ATLANTIC AMERICAN CORPORATION
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Form 10-K
|
|
|
þ
|
|
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
|
|
For the Fiscal Year Ended
December 31, 2006
|
or
|
o
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
|
Commission file number 0-3722
ATLANTIC AMERICAN
CORPORATION
(Exact name of registrant as
specified in its charter)
|
|
|
Georgia
|
|
58-1027114
|
(State or other jurisdiction
of
incorporation or organization)
|
|
(I.R.S. employer
identification no.)
|
4370 Peachtree Road,
N.E.,
|
|
|
Atlanta, Georgia
|
|
30319
|
(Address of principal executive
offices)
|
|
(Zip code)
|
(Registrants telephone number, including area code)
(404)
266-5500
Securities registered pursuant to section 12(b) of the
Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, $1.00 par value
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes o No þ
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
10-K or any
amendment to this
Form 10-K. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of accelerated filer and large
accelerated filer in
Rule 12b-2
of the Exchange Act. (Check one):
Large Accelerated
Filer o Accelerated
Filer o Non-Accelerated
Filer þ
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the Exchange
Act). Yes o No þ
The aggregate market value of voting and nonvoting common stock
held by non-affiliates of the registrant as of June 30,
2006, the last business day of the registrants most
recently completed second fiscal quarter, was $15,840,476. On
March 16, 2007 there were 21,536,573 shares of the
registrants common stock, par value $1.00 per share,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of the registrants Proxy Statement for
the Annual Meeting of Shareholders, to be held on May 1,
2007, have been incorporated by reference in
Items 10, 11, 12, 13 and 14 of Part III of this
Form 10-K.
PART I
The
Company
Atlantic American Corporation, a Georgia corporation
incorporated in 1968 (the Parent or
Company), is a holding company that operates through
its subsidiaries in well-defined specialty markets of the life,
health, property and casualty insurance industries. Atlantic
Americans principal subsidiaries are American Southern
Insurance Company and American Safety Insurance Company
(collectively known as American Southern),
Association Casualty Insurance Company and Association Risk
Management General Agency, Inc. (collectively known as
Association Casualty), Georgia Casualty &
Surety Company (Georgia Casualty) and Bankers
Fidelity Life Insurance Company (Bankers Fidelity).
Each subsidiary is managed separately based upon the geographic
location or the type of products offered and is evaluated on its
individual performance. Management has conformed information
systems, policies and procedures, products, marketing and
managerial responsibilities between Association Casualty and
Georgia Casualty to create a southern regional
property and casualty operation and increase efficiencies. The
Parent has no significant business operations of its own and
relies on fees, dividends and other distributions from its
insurance companies as the principal source of cash flow to meet
its obligations. Additional information regarding the cash flow
and liquidity needs of the Parent may be found in the Liquidity
and Capital Resources section of Managements Discussion
and Analysis of Financial Condition and Results of Operations.
The Companys strategy is to focus on well-defined
geographic, demographic
and/or
product niches within the insurance market place. Each of the
Companys subsidiaries operate with relative autonomy,
which allows for quick reaction to market opportunities. In
addition, the Company seeks to develop and expand cross-selling
opportunities and other synergies among its subsidiaries as they
arise.
Property
and Casualty Operations
The Companys property and casualty operations are composed
of three distinct entities, American Southern, Association
Casualty and Georgia Casualty. The primary products offered by
the Companys property and casualty operations are
described below, followed by an overview of each company.
Workers Compensation Insurance policies
provide indemnity and medical benefits to insured workers for
injuries sustained in the course of their employment.
Business Automobile Insurance policies provide
bodily injury
and/or
property damage liability coverage, uninsured motorist coverage
and physical damage coverage to commercial accounts.
General Liability Insurance policies cover bodily
injury and property damage liability for both premises and
completed operations exposures for general classes of business.
Property Insurance policies provide for payment of
losses on real and personal property caused by fire or other
multiple perils.
Personal Automobile Insurance policies provide
bodily injury
and/or
property damage liability coverage, uninsured motorists coverage
and physical damage coverage to individuals.
Surety Bonds are contracts under which one party,
the insurance company issuing the surety bond, guarantees to a
third party, that the primary party will fulfill an obligation
in accordance with a contractual agreement. This obligation may
involve meeting a contractual commitment, paying a debt or
performing certain duties.
American Southern. American Southern provides
tailored fleet automobile and long-haul physical damage
insurance coverage, on a multi-year contract basis, to state
governments, local municipalities and other large motor pools
and fleets (block accounts) that can be specifically
rated and underwritten. The size of the block accounts insured
by American Southern are such that individual class experience
generally can be determined, which allows for customized policy
terms and rates. American Southern is licensed to do business
2
in 29 states. While the majority of American
Southerns premiums are derived from auto liability and
auto physical damage, American Southern also offers both
property and general liability coverage. Additionally, American
Southern directly provides surety bond coverage for school bus
transportation and subdivision construction, as well as
performance and payment bonds. In recent years, American
Southern has increased its premium writings in the general
liability, primarily artisan and small contractors, and surety
lines of business and expects such trends to continue.
The following table summarizes, for the periods indicated, the
allocation of American Southerns net earned premiums from
each of its principal product lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Automobile liability
|
|
$
|
16,163
|
|
|
$
|
16,723
|
|
|
$
|
18,944
|
|
|
$
|
17,947
|
|
|
$
|
22,748
|
|
Automobile physical damage
|
|
|
9,698
|
|
|
|
11,002
|
|
|
|
11,187
|
|
|
|
9,451
|
|
|
|
9,829
|
|
General liability
|
|
|
11,394
|
|
|
|
11,767
|
|
|
|
10,102
|
|
|
|
5,777
|
|
|
|
3,647
|
|
Property
|
|
|
3,186
|
|
|
|
3,692
|
|
|
|
3,862
|
|
|
|
3,819
|
|
|
|
3,627
|
|
Surety
|
|
|
10,218
|
|
|
|
8,263
|
|
|
|
3,967
|
|
|
|
364
|
|
|
|
63
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
50,659
|
|
|
$
|
51,447
|
|
|
$
|
48,062
|
|
|
$
|
37,358
|
|
|
$
|
39,914
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Georgia Casualty. Georgia Casualty is a
property-casualty insurance company providing workers
compensation, commercial property, general liability, commercial
automobile, umbrella, inland marine and mechanical breakdown
coverage to businesses throughout the Southeastern United
States. Georgia Casualtys primary marketing focus is on
accounts with low to moderate hazard grades, ranging from
$20,000 to $250,000 in written premiums. In addition to the wide
range of commercial products available, Georgia Casualty offers
customized extension endorsements for various classes of
business, including, but not limited to, light manufacturing,
restaurants, country clubs and artisan contractors. These
products, along with risk management and claims services, are
offered through a network of independent agents. Georgia
Casualty is licensed to do business in thirteen states. Its
principal marketing territories include Florida, Georgia,
Kentucky, Mississippi, North Carolina, South Carolina and
Tennessee.
The following table summarizes, for the periods indicated, the
allocation of Georgia Casualtys net earned premiums from
each of its principal product lines:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Workers compensation
|
|
$
|
8,363
|
|
|
$
|
12,909
|
|
|
$
|
11,608
|
|
|
$
|
11,071
|
|
|
$
|
10,592
|
|
Business automobile
|
|
|
4,322
|
|
|
|
11,026
|
|
|
|
9,470
|
|
|
|
8,767
|
|
|
|
7,388
|
|
General liability
|
|
|
2,001
|
|
|
|
434
|
|
|
|
351
|
|
|
|
2,272
|
|
|
|
1,761
|
|
Property
|
|
|
6,532
|
|
|
|
14,901
|
|
|
|
13,246
|
|
|
|
12,209
|
|
|
|
10,003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
21,218
|
|
|
$
|
39,270
|
|
|
$
|
34,675
|
|
|
$
|
34,319
|
|
|
$
|
29,744
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Association Casualty. Association Casualty is
a property-casualty insurance company that offers workers
compensation, commercial property, commercial automobile,
general liability, umbrella and inland marine coverages
throughout Texas and surrounding states. Association Casualty
has adopted a strategy consistent with that of Georgia Casualty
and is focused on small to middle market accounts with low to
moderate hazard grades, ranging from $15,000 to $250,000 in
written premiums. In addition to a wide range of products,
customized extension endorsements are also offered to various
classes of business, including restaurants, light manufacturing
and country clubs. These particular products can be coupled with
specialized loss control and claims services and are offered
through a network of independent agents. Association Casualty is
licensed to do business in nine states and Texas is its
principal marketing territory.
3
The following table summarizes, for the periods indicated, the
allocation of Association Casualtys net earned premiums
from each of its principal product lines.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Workers compensation
|
|
$
|
8,374
|
|
|
$
|
9,613
|
|
|
$
|
11,357
|
|
|
$
|
13,196
|
|
|
$
|
18,950
|
|
Business automobile
|
|
|
4,899
|
|
|
|
4,265
|
|
|
|
4,119
|
|
|
|
2,307
|
|
|
|
1,811
|
|
General liability
|
|
|
1,027
|
|
|
|
350
|
|
|
|
558
|
|
|
|
385
|
|
|
|
221
|
|
Property
|
|
|
8,608
|
|
|
|
6,744
|
|
|
|
6,647
|
|
|
|
4,464
|
|
|
|
3,080
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,908
|
|
|
$
|
20,972
|
|
|
$
|
22,681
|
|
|
$
|
20,352
|
|
|
$
|
24,244
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life
and Health Operations
Bankers Fidelity. Bankers Fidelity constitutes
the life and health operations of the Company and offers a
variety of life and supplemental health products with a focus on
the senior markets. Products offered by Bankers Fidelity include
ordinary and term life insurance, Medicare supplement, cancer,
and other supplemental health insurance products. Health
business, primarily Medicare supplement, accounted for 81.4% of
Bankers Fidelitys net earned premiums in 2006. Life
insurance, including both whole and term life insurance
policies, accounted for 18.6% of Bankers Fidelitys
premiums in 2006. In terms of the number of policies written in
2006, 23% were life insurance policies and 77% were health
policies.
The following table summarizes, for the periods indicated, the
allocation of Bankers Fidelitys net earned premiums from
each of its principal product lines followed by a brief
description of the principal products:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands)
|
|
|
Life insurance
|
|
$
|
10,960
|
|
|
$
|
11,600
|
|
|
$
|
12,934
|
|
|
$
|
13,541
|
|
|
$
|
15,421
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medicare supplement
|
|
|
44,919
|
|
|
|
51,414
|
|
|
|
49,575
|
|
|
|
46,190
|
|
|
|
42,298
|
|
Cancer, accident and other health
|
|
|
3,041
|
|
|
|
2,890
|
|
|
|
2,933
|
|
|
|
2,952
|
|
|
|
2,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total health
|
|
|
47,960
|
|
|
|
54,304
|
|
|
|
52,508
|
|
|
|
49,142
|
|
|
|
45,176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,920
|
|
|
$
|
65,904
|
|
|
$
|
65,442
|
|
|
$
|
62,683
|
|
|
$
|
60,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life Insurance products include non-participating
individual term and whole life insurance policies with a variety
of riders and options.
Medicare Supplement Insurance includes 7 of the 13
standardized Medicare supplement policies created under the
Omnibus Budget Reconciliation Act of 1990 (OBRA
1990), which are designed to provide insurance coverage
for certain expenses not covered by the Medicare program,
including copayments and deductibles.
Cancer, Accident & Other Health Insurance
coverages include several policies providing for the payment of
benefits in connection with the treatment of diagnosed cancer,
as well as a number of other policies including facility care,
accident expense, hospital/surgical and disability.
Marketing
Property
and Casualty Operations
American Southern. A portion of American
Southerns business is marketed through a small number of
specialized, experienced independent agents. Most of American
Southerns agents are paid an up-front commission with the
potential for additional commissions by participating in a
profit sharing arrangement that is directly linked to the
profitability of the business generated. American Southern also
solicits business from
4
governmental entities. As an experienced writer for certain
governmental programs, the company actively pursues this market
on a direct basis. Much of this business is priced by means of
competitive bid situations and there can be no assurance that
the company can retain such business at the time of a specific
contract renewal. During 1998, American Southern formed American
Auto Club Insurance Agency, LLC in a 50/50 joint venture with
AAA Carolinas to market personal automobile insurance to the
members of the automobile club. This program produced gross
written premiums of approximately $2.6 million and
$8.6 million during 2006 and 2005, respectively. Effective
October 1, 2005, this joint venture was terminated due to
unfavorable underwriting results.
Association Casualty. Association Casualty was
represented by a field force of 68 independent agencies with 87
locations in Texas for the sale and distribution of its
insurance products at December 31, 2006. Each agency is a
party to a standard agency contract that sets forth the
commission structure and other terms. Association Casualty also
offers a contingent profit sharing arrangement that allows
agents to earn additional commissions when specific loss
experience and premium growth goals are achieved. Marketing
efforts are handled by an experienced staff of insurance
professionals, and complemented by the assistance of Association
Casualtys underwriting, loss control and claims staffs.
Georgia Casualty. Georgia Casualty was
represented by a field force of 58 independent agencies with 90
locations in eight states for the sale and distribution of its
insurance products at December 31, 2006. Each agency is a
party to a standard agency contract that sets forth the
commission structure and other terms. Georgia Casualty also
offers a contingent profit-sharing arrangement that allows
agents to earn additional commissions when specific loss
experience and premium growth goals are achieved. Marketing
efforts, directed by experienced marketing professionals, are
complemented by the underwriting, risk management, and audit
staffs of Georgia Casualty, who are available to assist agents
in the presentation of all insurance products and services to
their insureds.
Life
and Health Operations
Bankers Fidelity. Bankers Fidelity markets its
policies through commissioned, independent agents. In general,
Bankers Fidelity enters contractual arrangements with various
general agents, responsible for marketing and other activities,
who also, in turn, contract with independent agents. The
standard agreements set forth the commission arrangements and
are terminable by either party upon thirty days written
notice. General agents receive an override commission on sales
made by agents contracted by them. Management believes utilizing
experienced agents, as well as independent general agents who
recruit and train their own agents, is cost effective. All
independent agents are compensated on a pure commission basis.
Using independent agents also enables Bankers Fidelity to expand
or contract its sales forces at any time without incurring
significant additional expense.
Bankers Fidelity has implemented a selective agent qualification
process and had 1,900 licensed agents as of December 31,
2006. The agents concentrate their sales activities in either
the accident and health or life insurance product lines,
although the company is currently promoting greater cross
selling initiatives through property and casualty agencies,
association groups and worksite marketing agencies. During 2006,
approximately 500 agents wrote policies on behalf of Bankers
Fidelity.
Products of Bankers Fidelity compete directly with products
offered by other insurance companies, and agents may represent
several insurance companies. Bankers Fidelity, in an effort to
motivate agents to market its products, offers the following
agency services: a unique lead system, competitive products and
commission structures, efficient claims service, prompt payment
of commissions that immediately vest, simplified policy issue
procedures, periodic sales incentive programs and, in some
cases, protected sales territories determined based on specific
counties
and/or zip
codes.
Bankers Fidelity utilizes multiple distribution sales systems
including agency business which is centered around a lead
generation plan that rewards qualified agents with leads in
accordance with monthly production goals. In addition, a
protected territory is established for each qualified agent,
which entitles them to all leads produced within that territory.
The territories are zip code or county based and encompass
sufficient geographic territory to produce a minimum senior
population of 25,000. Bankers Fidelity also recruits at a
5
general agent level as well as at a managing general agent level
in an effort to use more than one distribution system to lower
expenses.
The Company believes these distribution systems solve an
agents most important dilemma
prospecting and allows Bankers Fidelity to build
long-term relationships with agents who view Bankers Fidelity as
their primary company. In addition, management believes that
Bankers Fidelitys product line is less sensitive to
competitor pricing and commissions because of the perceived
value of the protected territory and the lead generation plan.
In protected geographical areas, production per agent compares
favorably to unprotected areas served by the general brokerage
division.
Underwriting
Property
and Casualty Operations
American Southern specializes in underwriting various risks that
are sufficiently large enough to establish separate class
experience, relying upon the underwriting expertise of its
agents. In contrast, Georgia Casualty and Association Casualty
internally underwrite all of their individual accounts.
During the course of the policy year, extensive use is made of
risk management representatives to assist commercial
underwriters in identifying and correcting potential loss
exposures and to pre-inspect a majority of the new underwritten
accounts. The results of each product line are reviewed on a
stand-alone basis periodically. When the results are below
expectations, management takes appropriate corrective action
which may include adjusting rates, reviewing underwriting
standards, reducing commissions paid to agents, altering or
declining to renew accounts at expiration,
and/or
terminating agencies with an unprofitable book of business.
Life
and Health Operations
Bankers Fidelity issues a variety of products for both life and
health, which include senior life products typically with small
face amounts of between $1,000 and $30,000 and Medicare
supplement. The majority of its products are Yes or
No applications that are underwritten on a
non-medical basis. Bankers Fidelity offers products to all age
groups; however, its primary focus is the senior market. For
life products other than the senior market, Bankers Fidelity may
require medical information such as medical examinations subject
to age and face amount based on published guidelines.
Approximately 95% of the net premiums earned for both life and
health insurance sold during 2006 were derived from insurance
written below Bankers Fidelitys medical limits. For the
senior market, Bankers Fidelity issues products primarily on an
accept-or-reject
basis with face amounts up to $30,000 for
ages 45-70,
$20,000 for
ages 71-80
and $10,000 for
ages 81-85.
Bankers Fidelity retains a maximum amount of $50,000 with
respect to any individual life policy (see
Reinsurance).
Applications for insurance are reviewed to determine the face
amount, age, and medical history. Depending upon information
obtained from the insured, the Medical Information Bureau
(M.I.B.) report, paramedical testing,
and/or
medical records, special testing may be ordered. If deemed
necessary, Bankers Fidelity may use investigative services to
supplement and substantiate information. For certain limited
coverages, Bankers Fidelity has adopted simplified policy issue
procedures by which an application containing a variety of
Yes/No health related questions is submitted. For these plans, a
M.I.B. report is ordered, however, paramedical testing and
medical records are not ordered in most cases. All applications
for individuals age 60 and above are verified by telephone
interview.
Policyholder
and Claims Services
The Company believes that prompt, efficient policyholder and
claims services are essential to its continued success in
marketing its insurance products (see Competition).
Additionally, the Company believes that its insureds are
particularly sensitive to claims processing time and to the
accessibility of qualified staff to answer inquiries.
Accordingly, the Companys policyholder and claims services
seek to offer expeditious disposition of service requests by
providing toll-free access for all customers,
24-hour
claim reporting services, and direct computer links with some of
its largest accounts. The Company also utilizes a
state-of-the-art
6
automatic call distribution system to ensure that inbound calls
to customer service support groups are processed efficiently.
Operational data generated from this system allows management to
further refine ongoing client service programs and service
representative training modules.
The Company supports a Customer Awareness Program as the basis
for its customer service philosophy. All personnel are required
to attend customer service classes. Customer service hours of
operation have been expanded in all service areas to serve
customers and agents in all domestic time zones.
Property
and Casualty Operations
American Southern, Association Casualty, and Georgia Casualty
control their claims costs by utilizing an in-house staff of
claims supervisors to investigate, verify, negotiate and settle
claims. Upon notification of an occurrence purportedly giving
rise to a claim, a claim file is established. The claims
department then conducts a preliminary investigation, determines
whether an insurable event has occurred and, if so, updates the
file for the findings and any required reserve adjustments. The
property and casualty companies frequently utilize independent
adjusters and appraisers to service claims which require
on-site
inspections.
Life
and Health Operations
Insureds may obtain claim forms by calling the claims department
customer service group or through Bankers Fidelitys
website. To shorten claim processing time, a letter detailing
all supporting documents that are required to complete a claim
for a particular policy is sent to the customer along with the
correct claim form. With respect to life policies, the claim is
entered into Bankers Fidelitys claims system when the
proper documentation is received. Properly documented claims are
generally paid within three to nine business days of receipt.
With regard to Medicare supplement policies, the claim is either
directly billed to Bankers Fidelity by the provider or sent
electronically through a Medicare clearing house.
7
Reserves
The following table sets forth information concerning the
Companys reserves for losses and claims and reserves for
loss adjustment expenses (LAE) for the periods
indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Balance at January 1
|
|
$
|
168,617
|
|
|
$
|
167,133
|
|
|
$
|
150,092
|
|
Less: Reinsurance recoverables
|
|
|
(53,352
|
)
|
|
|
(57,429
|
)
|
|
|
(41,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at January 1
|
|
|
115,265
|
|
|
|
109,704
|
|
|
|
108,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
102,155
|
|
|
|
119,455
|
|
|
|
111,220
|
|
Prior years
|
|
|
(12,432
|
)
|
|
|
(6,708
|
)
|
|
|
(1,899
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total incurred
|
|
|
89,723
|
|
|
|
112,747
|
|
|
|
109,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
56,865
|
|
|
|
68,792
|
|
|
|
67,020
|
|
Prior years
|
|
|
38,345
|
|
|
|
38,309
|
|
|
|
41,867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total paid
|
|
|
95,210
|
|
|
|
107,101
|
|
|
|
108,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired reserves(1)
|
|
|
|
|
|
|
(85
|
)
|
|
|
930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net balance at December 31
|
|
|
109,778
|
|
|
|
115,265
|
|
|
|
109,704
|
|
Plus: Reinsurance recoverables
|
|
|
53,172
|
|
|
|
53,352
|
|
|
|
57,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31
|
|
$
|
162,950
|
|
|
$
|
168,617
|
|
|
$
|
167,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See Note 3 of Notes to Consolidated Financial Statements. |
Reserves are set by line of business within each of the
subsidiaries and a single line of business may be written in one
or more of the subsidiaries. Individual case reserves are
established by a claims processor on each individual claim and
are periodically reviewed and adjusted as new information
becomes known during the course of handling the claim. Lines of
business for which loss data (e.g. paid losses and case
reserves) emerge over a long period of time are referred to as
long-tail lines of business. Lines of business for which loss
data emerge more quickly are referred to as short-tail lines of
business. The Companys long-tail lines of business
generally include workers compensation and general
liability; the short-tail lines of business generally include
property and automobile coverages.
The Companys actuaries regularly review reserves for both
current and prior accident years using the most current claims
data. These regular reviews incorporate a variety of actuarial
methods (as discussed in Critical Accounting Policies) and
judgments and involve a disciplined analysis. For most lines of
business, certain actuarial methods and specific assumptions are
deemed more appropriate based on the current circumstances
affecting that line of business. These selections incorporate
input from claims personnel and operating management on reported
loss cost trends and other factors that could affect the reserve
estimates.
For long-tail lines of business, the emergence of paid losses
and case reserves is less credible in the early periods, and
accordingly may not be indicative of ultimate losses. For these
lines, methods which incorporate a development pattern
assumption are given less weight in calculating incurred but not
reported (IBNR) reserves for the early periods of
loss emergence because such a low percentage of ultimate losses
are reported in that time frame. Accordingly, for any given
accident year, the rate at which losses emerge in the early
periods is generally not as reliable an indication of the
ultimate loss costs as it would be for shorter-tail lines of
business. The estimation of reserves for these lines of business
in the early periods of loss emergence is therefore largely
influenced by statistical analysis and application of prior
accident years loss ratios after considering changes to
earned pricing, loss costs, mix of business, ceded reinsurance
and other factors that are
8
expected to affect the estimated ultimate losses. For later
periods of loss emergence, methods which incorporate a
development pattern assumption are given more weight in
estimating ultimate losses.
For short-tail lines of business, the emergence of paid loss and
case reserves is more credible and likely indicative of ultimate
losses. The method used to set reserves for these lines is based
upon utilization of a historical development pattern for
reported losses. IBNR reserves for the current year are set as
the difference between the estimated fully developed ultimate
losses for each year, less the established, related case
reserves and cumulative related payments. IBNR reserves for
prior accident years are similarly determined, again relying on
an indicated, historical development pattern for reported losses.
Based on the results of regular reserve estimate reviews, the
Company will determine the appropriate reserve adjustment, if
any, to record. If necessary, recorded reserve estimates are
changed after consideration of numerous factors, including, but
not limited to, the magnitude of the difference between the
actuarial indication and the recorded reserves, improvement or
deterioration of actuarial indication in the period, the
maturity of the accident year, trends observed over the recent
past and the level of volatility within a particular line of
business. In general, changes are made more quickly to recognize
changes in estimates to ultimate losses in mature accident years
and less volatile lines of business.
Estimating case reserves and ultimate losses involves various
considerations which differ according to line of business.
Workers compensation is a significant line of business for
the Company and is the one line with the longest pattern of loss
emergence. Reserve estimates for workers compensation are
particularly sensitive to assumptions about medical cost
inflation, which has been increasing steadily in recent years.
In addition, changes in state legislative and regulatory
environments impact the Companys estimates. Likewise,
general liability can also have a long pattern of loss
emergence. Given the broad nature of potential general liability
coverages, investigative time periods may be extended and
coverage questions may exist. Such uncertainties create greater
imprecision in estimating required levels of loss reserves. The
property and automobile lines of business generally have less
variable reserve estimates than other lines. This is largely due
to the coverages having relatively shorter periods of loss
emergence. Estimates, however, can still vary due to a number of
factors, including interpretations of frequency and severity
trends. Severity trends can be impacted by changes in internal
claim handling and reserving practices in addition to changes in
the external environment. These changes in claim practices
increase the uncertainty in the interpretation of case reserve
data, which increases the uncertainty in recorded reserve levels.
Components of the Companys reserves for losses and claims
by product line at December 31, 2006 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Case
|
|
|
IBNR
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Workers compensation
|
|
$
|
36,469
|
|
|
$
|
16,225
|
|
|
$
|
52,694
|
|
Business automobile
|
|
|
14,285
|
|
|
|
15,660
|
|
|
|
29,945
|
|
Personal automobile/physical damage
|
|
|
3,055
|
|
|
|
1,199
|
|
|
|
4,254
|
|
General & other liability
|
|
|
8,240
|
|
|
|
13,686
|
|
|
|
21,926
|
|
Commercial multi peril
|
|
|
3,966
|
|
|
|
21,366
|
|
|
|
25,332
|
|
Other lines (including life)
|
|
|
2,041
|
|
|
|
4,779
|
|
|
|
6,820
|
|
Medicare supplement
|
|
|
247
|
|
|
|
7,928
|
|
|
|
8,175
|
|
Unallocated loss adjustment
reserves
|
|
|
|
|
|
|
13,804
|
|
|
|
13,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reserves for losses and
claims
|
|
$
|
68,303
|
|
|
$
|
94,647
|
|
|
$
|
162,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys policy is to record reserves for losses and
claims in amounts which approximate actuarial best estimates of
ultimate values. Actuarial best estimates do not necessarily
represent the midpoint value determined using the various
actuarial methods; however, such estimates will fall between the
estimated low and high end reserve values. The range of
estimates developed in connection with the December 31,
2006 review indicated that reserves could be as much as 13.1%
lower or as much as 2.6% higher. In the opinion of management,
recorded reserves represent the best estimate of outstanding
losses, although significant
9
judgments are made in the derivation of reserve estimates and
revisions to such estimates will be made in future periods. Any
such revisions could be material.
Property
and Casualty Operations
The Companys property and casualty operations maintain
loss reserves representing estimates of amounts necessary for
payment of losses and LAE and are not discounted. The property
and casualty operations also maintain IBNR reserves and bulk
reserves for future development. These loss reserves are
estimates, based on known facts and circumstances at a given
point in time, of amounts the insurer expects to pay on incurred
claims. All balances are reviewed periodically by both internal
and external qualified actuaries. Reserves for LAE are intended
to cover the ultimate costs of settling claims, including
investigation and defense of lawsuits resulting from such
claims. Loss reserves for reported claims are based on a
case-by-case
evaluation of the type of claim involved, the circumstances
surrounding the claim, and the policy provisions relating to the
type of loss along with anticipated future development. The LAE
for claims reported and claims not reported is based on
historical statistical data and anticipated future development.
Inflation and other factors which may affect claim payments are
implicitly reflected in the reserving process through analysis
and consideration of cost trends and reviews of historical
reserve results.
The property and casualty operations establish reserves for
claims based upon: (a) managements estimate of
ultimate liability and claims adjusters evaluations for
unpaid claims reported prior to the close of the accounting
period, (b) estimates of IBNR claims based on past
experience, and (c) estimates of LAE. The estimated
liability is periodically reviewed and updated, and changes to
the estimated liability are recorded in the statement of
operations in the year in which such changes become known.
The following table sets forth the development of reserves for
unpaid losses and claims determined using generally accepted
accounting principles of the property and casualty
operations insurance lines from 1996 through 2006.
Development from acquired companies are included from the year
of acquisition. Specifically excluded from the table are the
life and health divisions claims reserves, which are
included in the consolidated loss and claims reserves. The top
line of the table represents the estimated cumulative amount of
losses and LAE for claims arising in all prior years that were
unpaid at the balance sheet date for each of the indicated
periods, including an estimate of losses that had been incurred
but not yet reported at the applicable date. The amounts
represent initial reserve estimates at the respective balance
sheet dates for the current and all prior years. The next
portion of the table shows the cumulative amounts paid with
respect to claims in each succeeding year. The lower portion of
the table shows the re-estimated amounts of previously recorded
reserves based on experience as of the end of each succeeding
year.
The reserve estimates are modified as more information becomes
known about the frequency and severity of claims for individual
years. The cumulative redundancy or deficiency for
each year represents the aggregate change in such years
estimates through the end of 2006. In evaluating this
information, it should be noted that the amount of the
redundancy or deficiency for any year represents the cumulative
amount of the changes from initial reserve estimates for such
year. Operations for any year may be affected, favorably or
unfavorably, by the amount of the change in the estimate for
such years; however, because such analysis is based on the
reserves for unpaid losses and claims, before consideration of
reinsurance, the total indicated redundancies
and/or
deficiencies may not ultimately be reflected in the
Companys net income. Further, conditions and trends that
have affected development of the reserves in the past may not
necessarily occur in the future and there could be future events
or actions that would impact future development which have not
existed in the past. Accordingly, it is impossible to accurately
predict future redundancies or deficiencies based on the data in
the following table.
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
1997
|
|
|
1996
|
|
|
|
(In thousands)
|
|
|
Reserve for losses and
LAE
|
|
$
|
153,314
|
|
|
$
|
158,393
|
|
|
$
|
156,415
|
|
|
$
|
139,560
|
|
|
$
|
139,802
|
|
|
$
|
135,948
|
|
|
$
|
126,263
|
|
|
$
|
120,235
|
|
|
$
|
81,070
|
|
|
$
|
81,657
|
|
|
$
|
79,776
|
|
Cumulative paid as
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
|
|
|
|
48,498
|
|
|
|
53,752
|
|
|
|
52,420
|
|
|
|
48,628
|
|
|
|
52,644
|
|
|
|
48,780
|
|
|
|
38,957
|
|
|
|
26,357
|
|
|
|
25,799
|
|
|
|
25,925
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
78,614
|
|
|
|
77,924
|
|
|
|
81,083
|
|
|
|
78,654
|
|
|
|
78,496
|
|
|
|
63,496
|
|
|
|
43,749
|
|
|
|
38,756
|
|
|
|
38,330
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,956
|
|
|
|
97,438
|
|
|
|
98,580
|
|
|
|
93,599
|
|
|
|
80,824
|
|
|
|
54,408
|
|
|
|
48,330
|
|
|
|
45,073
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,608
|
|
|
|
108,587
|
|
|
|
106,022
|
|
|
|
90,266
|
|
|
|
61,981
|
|
|
|
54,840
|
|
|
|
50,334
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,161
|
|
|
|
111,833
|
|
|
|
100,393
|
|
|
|
66,467
|
|
|
|
58,891
|
|
|
|
53,833
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,319
|
|
|
|
104,658
|
|
|
|
72,925
|
|
|
|
61,600
|
|
|
|
56,534
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,749
|
|
|
|
75,486
|
|
|
|
65,744
|
|
|
|
59,029
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,672
|
|
|
|
68,042
|
|
|
|
61,671
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
69,118
|
|
|
|
63,321
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
64,259
|
|
Ultimate losses and LAE
reestimated as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
153,314
|
|
|
|
158,393
|
|
|
|
156,415
|
|
|
|
139,560
|
|
|
|
139,802
|
|
|
|
135,948
|
|
|
|
126,263
|
|
|
|
120,235
|
|
|
|
81,070
|
|
|
|
81,657
|
|
|
|
79,776
|
|
One year later
|
|
|
|
|
|
|
142,599
|
|
|
|
148,576
|
|
|
|
146,058
|
|
|
|
143,771
|
|
|
|
136,606
|
|
|
|
130,415
|
|
|
|
115,019
|
|
|
|
80,174
|
|
|
|
75,243
|
|
|
|
76,269
|
|
Two years later
|
|
|
|
|
|
|
|
|
|
|
140,575
|
|
|
|
144,989
|
|
|
|
149,552
|
|
|
|
143,901
|
|
|
|
136,425
|
|
|
|
117,289
|
|
|
|
81,023
|
|
|
|
73,037
|
|
|
|
70,734
|
|
Three years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140,182
|
|
|
|
148,755
|
|
|
|
146,775
|
|
|
|
140,039
|
|
|
|
122,099
|
|
|
|
83,149
|
|
|
|
75,199
|
|
|
|
68,816
|
|
Four years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
145,602
|
|
|
|
147,618
|
|
|
|
143,400
|
|
|
|
125,006
|
|
|
|
83,033
|
|
|
|
76,758
|
|
|
|
70,932
|
|
Five years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,298
|
|
|
|
142,646
|
|
|
|
129,797
|
|
|
|
83,182
|
|
|
|
76,832
|
|
|
|
72,430
|
|
Six years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
142,304
|
|
|
|
128,299
|
|
|
|
86,132
|
|
|
|
76,886
|
|
|
|
72,243
|
|
Seven years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
127,955
|
|
|
|
85,285
|
|
|
|
77,692
|
|
|
|
72,401
|
|
Eight years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,628
|
|
|
|
77,574
|
|
|
|
72,144
|
|
Nine years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77,867
|
|
|
|
72,208
|
|
Ten years later
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72,323
|
|
Cumulative redundancy (deficiency)
|
|
|
|
|
|
$
|
15,794
|
|
|
$
|
15,840
|
|
|
$
|
(622
|
)
|
|
$
|
(5,800
|
)
|
|
$
|
(10,350
|
)
|
|
$
|
(16,041
|
)
|
|
$
|
(7,720
|
)
|
|
$
|
(4,558
|
)
|
|
$
|
3,790
|
|
|
$
|
7,453
|
|
|
|
|
|
|
|
|
10.0
|
%
|
|
|
10.1
|
%
|
|
|
−0.4
|
%
|
|
|
−4.1
|
%
|
|
|
−7.6
|
%
|
|
|
−12.7
|
%
|
|
|
−6.4
|
%
|
|
|
−5.6
|
%
|
|
|
4.6
|
%
|
|
|
9.3
|
%
|
Note: Because this analysis is based on reserves for unpaid
losses and claims, before consideration of reinsurance, the
total indicated redundancies
and/or
deficiencies may not ultimately be reflected in the
Companys net income.
11
Life
and Health Operations
Bankers Fidelity establishes liabilities for future policy
benefits to meet projected future obligations under outstanding
policies. These reserves are calculated to satisfy policy and
contract obligations as they mature. The amount of reserves for
insurance policies is calculated using assumptions for interest
rates, mortality and morbidity rates, expenses, and withdrawals.
Reserves are adjusted periodically based on published actuarial
tables with modification to reflect actual experience (see
Note 3 of Notes to Consolidated Financial Statements).
Reinsurance
The Companys insurance subsidiaries may purchase
reinsurance from unaffiliated insurers and reinsurers to reduce
their liability on individual risks and to protect against
catastrophic losses. In a reinsurance transaction, an insurance
company transfers, or cedes, a portion or all of its
exposure on insurance policies to a reinsurer. The reinsurer
assumes the exposure in return for a portion of the premiums.
The ceding of insurance does not legally discharge the insurer
from primary liability for the full amount of policies written
by it, and the ceding company incurs a loss if the reinsurer
fails to meet its obligations under the reinsurance agreement.
Property
and Casualty Operations
American Southern. American Southerns
basic reinsurance treaties generally cover all claims in excess
of $150,000 per occurrence. Limits per occurrence within
the reinsurance treaties are as follows: Fire, inland marine,
commercial automobile and physical damage $125,000
excess of $50,000 retention; all other lines vary by type of
policy and generally have retentions in excess of $100,000, up
to $150,000. American Southern maintains a property catastrophe
treaty with a $6.6 million limit excess of $400,000
retention. American Southern also issues individual surety bonds
with face amounts generally up to $1.5 million, and limited
to $5.0 million per account, that are not subject to
reinsurance.
Association Casualty. Association
Casualtys basic reinsurance treaties cover all claims in
excess of $300,000 per occurrence. Limits per occurrence
within the reinsurance treaties and excess of the retention are
as follows: Workers compensation
$20.0 million; Property per location
$15.0 million; Excess of policy and extra contractual
obligations $20.0 million;
Liability $11.0 million; and Surety
$10.0 million. In 2006, Association Casualty maintained a
property catastrophe reinsurance treaty with a
$12.0 million limit excess of $500,000 retention with one
automatic reinstatement. As a result of the 2005 and 2004
catastrophe experience, Association Casualty prepaid its 2006
automatic reinstatement premium at a discount on the
$7.0 million excess $500,000 retention layer. Prior to
2006, Association Casualty maintained a property catastrophe
reinsurance treaty with only a $7.0 million limit excess of
$500,000 retention also with one automatic reinstatement.
Georgia Casualty. Georgia Casualtys
basic reinsurance treaties cover all claims in excess of
$300,000 per occurrence. Limits per occurrence within the
reinsurance treaties and excess of the retention are as follows:
Workers compensation $20.0 million;
Property per location $15.0 million; Excess of
policy and extra contractual obligations
$20.0 million; Liability $11.0 million;
and Surety $10.0 million. In 2006, Georgia
Casualty maintained a property catastrophe reinsurance treaty
with a $12.0 million limit excess of $500,000 retention
with one automatic reinstatement. As a result of the 2005 and
2004 catastrophe experience, Georgia Casualty prepaid its 2006
automatic reinstatement premium at a discount on the
$7.0 million excess $500,000 retention layer. Prior to
2006, Georgia Casualty maintained a property catastrophe
reinsurance treaty with only a $7.0 million limit excess of
$500,000 retention also with one automatic reinstatement.
Life
and Health Operations
Bankers Fidelity. Bankers Fidelity has entered
into reinsurance contracts ceding the excess of its retention to
several primary reinsurers. Maximum retention by Bankers
Fidelity on any one individual in the case of life insurance
policies is $50,000. At December 31, 2006, Bankers Fidelity
reinsured $37.2 million of
12
the $269.3 million of life insurance in force, generally
under yearly renewable term agreements. Certain prior year
reinsurance agreements remain in force although they no longer
provide reinsurance for new business.
Competition
Competition is based on many factors including premiums charged,
terms and conditions of coverage, service provided, financial
ratings assigned by independent rating agencies, claims
services, reputation, perceived financial strength and the
experience of the organization in the line of business being
written.
Property
and Casualty Operations
American Southern. The businesses in which
American Southern engages are highly competitive. The principal
areas of competition are pricing and service. Many competing
property and casualty companies, which have been in business
longer than American Southern, offer more diversified lines of
insurance and have substantially greater financial resources.
Management believes, however, that the policies it sells are
competitive with those providing similar benefits offered by
other insurers doing business in the states where American
Southern operates.
Association Casualty. The Texas market,
historically Association Casualtys primary market, is
extremely competitive. Association Casualtys competition
comes primarily from carriers that are of a larger size than
Association Casualty as well as a state fund that writes
monoline workers compensation insurance. Association
Casualtys strong focus and commitment to its target
markets has enabled it to forge stronger ties with the agency
networks that represent the company. Insurance products that
provide a full range of commercial coverage, as well as
customized loss control and claims services, position the agency
partners to compete effectively within their respective
geographic locations. Association Casualty generally writes
workers compensation coverage as a part of its total
insurance package. Flexible commission agreements award the
greatest commissions to those agents that demonstrate loyalty
and commitment to Association Casualty through continued premium
growth and profitability. This further allows Association
Casualty to be competitive in the marketplace.
Georgia Casualty. Georgia Casualtys
insurance business is also extremely competitive. The
competition includes: (1) companies with higher
A.M. Best ratings, as described below, (2) alternative
workers compensation markets, and (3) self-insured
funds. Georgia Casualtys efforts are directed in the
following three general categories where the company believes it
has the best opportunity to control exposures and claims:
(1) manufacturing, (2) artisan contractors, and
(3) service industries. Management believes that Georgia
Casualtys key to being competitive in these areas is
maintaining strong underwriting standards, risk management
programs, writing workers compensation coverage as part of
its total insurance package, maintaining and expanding its loyal
network of agents and development of new agents in key
territories. In addition, Georgia Casualty offers quality
customer service to its agents and insureds, and provides
rehabilitation, medical management, and claims management
services to its insureds. Georgia Casualty believes that it will
continue to be competitive in the marketplace based on its
current strategies and services.
Life
and Health Operations
The life and health insurance business also remains highly
competitive and includes a large number of insurance companies,
many of which have substantially greater financial resources
than Bankers Fidelity or the Company. Bankers Fidelity focuses
on four core products in the senior market: Medicare supplement,
hospital indemnity, small face amount life insurance and
short-term nursing home coverage. Bankers Fidelity believes that
its primary competitors in this market are Continental Life,
Standard Life & Accident, Lincoln Heritage Life, United
American, American Pioneer and Blue Cross / Blue Shield. Bankers
Fidelity competes with these as well as other insurers on the
basis of premium rates, policy benefits and service to
policyholders. Bankers Fidelity also competes with other
insurers to attract and retain the allegiance of its independent
agents through commission arrangements, accessibility and
marketing assistance, lead programs, reputation, and market
expertise. Bankers Fidelity utilizes a proprietary lead
generation program to attract and retain independent agents.
Bankers Fidelity has expanded into other markets through
cross-selling strategies with the
13
companys property and casualty affiliations, offering
turn-key marketing programs to facilitate business through these
relationships. Bankers Fidelity continues to expand in niche
markets through long-term relationships with a select number of
independent marketing organizations including worksite
marketing, credit union business and association endorsements.
Bankers Fidelity has a track record of competing in its chosen
markets through long-standing relationships with independent
agents and marketing agencies by providing proprietary marketing
initiatives and outstanding service to distribution and
policyholders. Bankers Fidelity believes that it competes
effectively on the basis of policy benefits, services and market
expertise.
Ratings
Ratings of insurance companies are not designed for investors
and do not constitute recommendations to buy, sell, or hold any
security. Ratings are important measures within the insurance
industry, and improved ratings should have a favorable impact on
the ability of a company to compete in the marketplace.
Each year A.M Best Company, Inc. (A.M. Best)
publishes Bests Insurance Reports, which includes
assessments and ratings of all insurance companies.
A.M. Bests ratings, which may be revised quarterly,
fall into fifteen categories ranging from A++ (Superior) to F
(in liquidation). A.M. Bests ratings are based on a
detailed analysis of the statutory financial condition and
operations of an insurance company compared to the industry in
general.
American Southern. American Southern and its
wholly-owned subsidiary, American Safety Insurance Company, are
each currently rated A− (Excellent) by
A.M. Best.
Association Casualty. Association Casualty is
currently rated A− (Excellent) by
A.M. Best.
Georgia Casualty. Georgia Casualty is
currently rated B++ (Very Good) by A.M. Best.
Bankers Fidelity. Bankers Fidelity is
currently rated B++ (Very Good) by A.M. Best.
Regulation
In common with all domestic insurance companies, the
Companys insurance subsidiaries are subject to regulation
and supervision in the jurisdictions in which they do business.
Statutes typically delegate regulatory, supervisory, and
administrative powers to state insurance commissioners. The
method of such regulation varies, but regulation relates
generally to the licensing of insurers and their agents, the
nature of and limitations on investments, approval of policy
forms, reserve requirements, the standards of solvency to be met
and maintained, deposits of securities for the benefit of
policyholders, and periodic examinations of insurers and trade
practices, among other things. The Companys products
generally are subject to rate regulation by state insurance
commissions, which require that certain minimum loss ratios be
maintained. Certain states also have insurance holding company
laws which require registration and periodic reporting by
insurance companies controlled by other corporations licensed to
transact business within their respective jurisdictions. The
Companys insurance subsidiaries are subject to such
legislation and are registered as controlled insurers in those
jurisdictions in which such registration is required. Such laws
vary from state to state, but typically require periodic
disclosure concerning the corporation which controls the
registered insurers and all subsidiaries of such corporations,
as well as prior notice to, or approval by, the state insurance
commissioners of intercorporate transfers of assets (including
payments of dividends by the insurance subsidiaries in excess of
specified amounts) within the holding company system.
Most states require that rate schedules and other information be
filed with the states insurance regulatory authority,
either directly or through a rating organization with which the
insurer is affiliated. The regulatory authority may disapprove a
rate filing if it determines that the rates are inadequate,
excessive, or discriminatory. The Company has historically
experienced no significant regulatory resistance to its
applications for rate adjustments; however, the Company cannot
provide any assurance that it will not receive any objections to
its applications in the future.
A state may require that acceptable securities be deposited for
the protection either of policyholders located in those states
or of all policyholders. As of December 31, 2006,
securities with an amortized cost of
14
$17.9 million were on deposit either directly with various
state authorities or with third parties pursuant to various
custodial agreements on behalf of the Companys insurance
subsidiaries.
Virtually all of the states in which the Companys
insurance subsidiaries are licensed to transact business require
participation in their respective guaranty funds designed to
cover claims against insolvent insurers. Insurers authorized to
transact business in these jurisdictions are generally subject
to assessments of up to 4% of annual direct premiums written in
that jurisdiction to pay such claims, if any. The likelihood and
amount of any future assessments cannot be estimated until an
insolvency has occurred. For 2006, 2005, and 2004, the amounts
expensed by the Company for such assessments were
$0.4 million, $0.1 million, and $0.6 million,
respectively.
Workers compensation insurance carriers authorized to
transact business in certain states are required to participate
in second injury trust funds of those states. A second injury
trust fund is a state-mandated monetary reserve designed to
remove financial disincentives from the employment of
individuals with disabilities. Without a second injury trust
fund, the employer or insurer might be required to absorb full
indemnity
and/or
medical and rehabilitation costs if a worker suffered increased
disability from a work-related injury because of a pre-existing
condition. Second injury trust funds are used to reimburse
indemnity and medical costs to employer/insurers on accepted,
qualified second injury cases. For 2006, 2005, and 2004, the
amounts expensed by the Company in connection with such
assessments were $1.7 million, $1.2 million, and
$1.1 million, respectively. The increase during 2006 was
primarily due to a $1.0 million revision in the estimate of
the cumulative second injury trust fund accrual recorded in the
second quarter.
NAIC
Ratios
The National Association of Insurance Commissioners (the
NAIC) was established to, among other things,
provide guidelines to assess the financial strength of insurance
companies for state regulatory purposes. The NAIC conducts
annual reviews of the financial data of insurance companies
primarily through the application of 13 financial ratios
prepared on a statutory basis. The annual statements are
submitted to state insurance departments to assist them in
monitoring insurance companies in their state and to set forth a
desirable range in which companies should fall in each such
ratio.
The NAIC suggests that insurance companies which fall outside of
the usual range in four or more financial ratios are
those most likely to require analysis by state regulators.
However, according to the NAIC, it may not be unusual for a
financially sound company to have several ratios outside the
usual range, and in normal years the NAIC expects
15% of the companies it tests to be outside the
usual range in four or more categories.
For the year ended December 31, 2006, Association Casualty
and American Southern were within the NAIC usual
range for all 13 financial ratios. Bankers Fidelity was outside
the usual range on one ratio: the change in premium.
The change in premium variance was primarily due to a decline in
new business levels and the loss, during 2006, of certain
existing policies that resulted from increased competition.
Georgia Casualty was outside the usual range on two
ratios: the change in net writings and the two year overall
operating ratio variance. The change in net writings ratio
variance was primarily due to the decrease in assumed premium.
During the third quarter of 2005, Georgia Casualty no longer
assumed new business written by Association Casualty. The two
year overall operating ratio variance was primarily due not only
to hurricane related losses but also several other large losses
during 2005.
Risk-Based
Capital
Risk-based capital (RBC) is used by rating agencies
and regulators as an early warning tool to identify weakly
capitalized companies for the purpose of initiating further
regulatory action. The RBC calculation determines the amount of
adjusted capital needed by a company to avoid regulatory action.
Authorized Control
Level Risk-Based
Capital (ACL) is calculated, and if a
companys adjusted capital is 200% or lower than ACL, it is
subject to regulatory action. At December 31, 2006, all of
the Companys insurance subsidiaries exceeded the RBC
regulatory levels.
15
Investments
Investment income represents a significant portion of the
Companys total income. Insurance company investments are
subject to state insurance laws and regulations which limit the
concentration and types of investments. The following table
provides information on the Companys investments as of the
dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
Amount
|
|
|
Percent
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Government agencies and
authorities
|
|
$
|
178,395
|
|
|
|
55.9
|
%
|
|
$
|
141,572
|
|
|
|
46.5
|
%
|
|
$
|
125,855
|
|
|
|
41.7
|
%
|
States, municipalities and
political subdivisions
|
|
|
824
|
|
|
|
0.3
|
|
|
|
1,037
|
|
|
|
0.3
|
|
|
|
1,144
|
|
|
|
0.4
|
|
Public utilities
|
|
|
4,838
|
|
|
|
1.5
|
|
|
|
4,932
|
|
|
|
1.6
|
|
|
|
5,939
|
|
|
|
2.0
|
|
All other corporate bonds
|
|
|
59,561
|
|
|
|
18.7
|
|
|
|
61,040
|
|
|
|
20.1
|
|
|
|
71,327
|
|
|
|
23.6
|
|
Redeemable preferred stock
|
|
|
18,598
|
|
|
|
5.8
|
|
|
|
24,889
|
|
|
|
8.2
|
|
|
|
24,900
|
|
|
|
8.2
|
|
Certificates of deposit
|
|
|
100
|
|
|
|
0.0
|
|
|
|
100
|
|
|
|
0.0
|
|
|
|
300
|
|
|
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities(1)
|
|
|
262,316
|
|
|
|
82.2
|
|
|
|
233,570
|
|
|
|
76.7
|
|
|
|
229,465
|
|
|
|
76.0
|
|
Common and non-redeemable
preferred stocks(2)
|
|
|
28,826
|
|
|
|
9.0
|
|
|
|
34,445
|
|
|
|
11.3
|
|
|
|
38,407
|
|
|
|
12.7
|
|
Mortgage, policy and student
loans(3)
|
|
|
3,327
|
|
|
|
1.1
|
|
|
|
4,017
|
|
|
|
1.3
|
|
|
|
5,318
|
|
|
|
1.8
|
|
Other invested assets(4)
|
|
|
3,030
|
|
|
|
1.0
|
|
|
|
3,660
|
|
|
|
1.2
|
|
|
|
4,569
|
|
|
|
1.5
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
|
|
38
|
|
|
|
|
|
Investment in unconsolidated trusts
|
|
|
1,238
|
|
|
|
0.4
|
|
|
|
1,238
|
|
|
|
0.4
|
|
|
|
1,238
|
|
|
|
0.4
|
|
Short-term investments(5)
|
|
|
20,188
|
|
|
|
6.3
|
|
|
|
27,726
|
|
|
|
9.1
|
|
|
|
23,073
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
318,963
|
|
|
|
100.0
|
%
|
|
$
|
304,694
|
|
|
|
100.0
|
%
|
|
$
|
302,108
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Fixed maturity securities are carried on the balance sheet at
estimated fair value. Total cost of fixed maturity securities
was $260.4 million as of December 31, 2006,
$234.2 million as of December 31, 2005, and
$226.5 million as of December 31, 2004. |
|
(2) |
|
Equity securities are carried on the balance sheet at estimated
fair value. Certain non-redeemable preferred stocks do not have
publicly quoted values, and are carried at estimated fair value
as determined by management. Total cost of equity securities was
$11.3 million as of December 31, 2006,
$13.7 million as of December 31, 2005, and
$14.7 million as of December 31, 2004. |
|
(3) |
|
Mortgage, policy and student loans are valued at historical cost. |
|
(4) |
|
Investments in other invested assets which are traded are valued
at estimated fair value and the others are accounted for using
the equity method. Total cost of other invested assets was
$3.1 million as of December 31, 2006,
$3.7 million as of December 31, 2005, and
$4.6 million as of December 31, 2004. |
|
(5) |
|
Short-term investments are valued at cost, which approximates
market value. |
16
Results of the investment portfolio for periods shown were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Average investments(1)
|
|
$
|
306,927
|
|
|
$
|
294,411
|
|
|
$
|
290,256
|
|
Net investment income
|
|
|
18,148
|
|
|
|
16,460
|
|
|
|
15,640
|
|
Average yield on investments
|
|
|
5.91
|
%
|
|
|
5.59
|
%
|
|
|
5.39
|
%
|
Realized investment gains
(losses), net(2)
|
|
|
6,691
|
|
|
|
(10,456
|
)
|
|
|
2,199
|
|
|
|
|
(1) |
|
Calculated as the average of the balances at the beginning of
the year and at the end of each of the succeeding four quarters. |
|
(2) |
|
Includes a $10.7 million impairment charge in 2005 related
to the write-down in the value of certain automotive sector
fixed maturity investments. See Note 2 of Notes to
Consolidated Financial Statements. |
Managements investment strategy is an increased investment
in short and medium maturity bonds and common and preferred
stocks.
Employees
The Company and its subsidiaries employed 253 people at
December 31, 2006.
Financial
Information By Industry Segment
The Companys primary insurance subsidiaries operate with
relative autonomy and each company is evaluated on its
individual performance. American Southern, Association Casualty,
and Georgia Casualty operate in the Property and Casualty
insurance market, while Bankers Fidelity operates in the Life
and Health insurance market. All segments derive revenue from
the collection of premiums, as well as from investment income.
Substantially all revenue other than that in the corporate and
other segment is from external sources. (See Note 14 of
Notes to Consolidated Financial Statements.)
Available
Information
The Company files annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
amendments to those reports and other information with the
Securities and Exchange Commission (the SEC). The
public can read and obtain copies of those materials by visiting
the SECs Public Reference Room at 100 F Street, NE,
Washington, DC 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The SEC maintains a website that contains reports, proxy and
information statements and other information regarding issuers
like Atlantic American that file electronically with the SEC.
The address of the SECs web site is http://www.sec.gov. In
addition, as soon as reasonably practicable after such materials
are filed with or furnished to the SEC by the Company, the
Company makes copies available to the public, free of charge, on
or through its web site at
http://www.atlam.com.
Executive
Officers of the Registrant
The table below and the information following the table set
forth, for each executive officer of the Company as of
March 1, 2007, his name, age, positions with the Company
and business experience for the past five years, as well as any
prior service with the Company (based upon information supplied
by each of them).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director or
|
|
Name
|
|
Age
|
|
|
Position with the Company
|
|
Officer Since
|
|
|
J. Mack Robinson
|
|
|
83
|
|
|
Chairman of the Board
|
|
|
1974
|
|
Hilton H. Howell, Jr.
|
|
|
44
|
|
|
Director, President & CEO
|
|
|
1992
|
|
John G. Sample, Jr.
|
|
|
50
|
|
|
Senior Vice President &
CFO
|
|
|
2002
|
|
17
Officers are elected annually and serve at the discretion of the
Board of Directors.
Mr. Robinson has served as a Director and Chairman
of the Board since 1974 and served as President and Chief
Executive Officer of the Company from September 1988 to May
1995. In addition, Mr. Robinson is a director of Gray
Television, Inc.
Mr. Howell has been President and Chief Executive
Officer of the Company since May 1995, and prior thereto served
as Executive Vice President of the Company from October 1992 to
May 1995. He has been a Director of the Company since October
1992. Mr. Howell is the
son-in-law
of Mr. Robinson. He is also a director of Triple Crown
Media, Inc. and Gray Television, Inc.
Mr. Sample has served as Senior Vice President and
Chief Financial Officer of the Company since July 2002. He also
serves in the following capacities at subsidiaries of the
Company: Director of Georgia Casualty, Director of Association
Casualty, and Director of Bankers Fidelity. Prior to joining the
Company in July 2002, he was a partner of Arthur Andersen LLP
since 1990. He is also a director of 1st Franklin Financial
Corporation.
Forward-Looking
Statements
Certain of the statements contained herein are forward-looking
statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and include estimates and
assumptions related to, among other things, economic,
competitive and legislative developments. The forward-looking
statements are subject to changes and uncertainties which are,
in many instances, beyond the Companys control and have
been made based upon managements current expectations and
beliefs concerning future developments and their potential
effect upon the Company. There can be no assurance that future
developments will be in accordance with managements
expectations or that the effect of future developments on the
Company will be those anticipated by management. Actual results
could differ materially from those expected by the Company,
depending on the outcome of various factors. These factors
include, among others, those discussed in the Risk
Factors section which follows and: unanticipated increases
in the rate, number and amounts of claims outstanding; the
possible occurrence of terrorist attacks; the level of
performance of reinsurance companies under reinsurance contracts
and the availability, pricing and adequacy of reinsurance to
protect the Company against losses; changes in the stock
markets, interest rates or other financial markets, including
the potential effect on the Companys statutory capital
levels; the uncertain effect on the Company of regulatory and
market-driven changes in practices relating to the payment of
incentive compensation to brokers, agents and other producers;
the incidence and severity of catastrophes, both natural and
man-made; stronger than anticipated competitive activity;
unfavorable judicial or legislative developments, including the
possibility that the Terrorism Risk Insurance Act of 2002 is not
ultimately extended; the potential effect of regulatory
developments, including those which could increase the
Companys business costs and required capital levels; the
possibility of general economic and business conditions that are
less favorable than anticipated; the Companys ability to
distribute its products through distribution channels, both
current and future; the uncertain effect of emerging claim and
coverage issues; and the effect of assessments and other
surcharges for guaranty funds and second-injury trust funds and
other mandatory pooling arrangements. Many of such factors are
beyond the Companys ability to control or predict. As a
result, the Companys actual financial condition, results
of operations and stock price could differ materially from those
expressed in any forward-looking statements made by the Company.
Undue reliance should not be placed upon forward-looking
statements contained herein. The Company does not intend to
publicly update any forward-looking statements that may be made
from time to time by, or on behalf of, the Company.
There are numerous factors, many beyond our control, which could
have a significant or material adverse effect on our business,
financial condition, operating results or liquidity. Any factor
discussed below or elsewhere in this report could by itself or,
together with one or more factors, cause results to differ
significantly from our expectations. Further, there may be
significant additional risks which management has
18
not considered which could have a significant or material
adverse effect on the business, financial condition, operating
results or liquidity of the Company.
We
operate in a highly competitive environment.
The life and health and property and casualty insurance
businesses are highly competitive. We compete with large
national insurance companies, locally-based specialty carriers
and alternative risk transfer entities whose activities are
directed to limited markets. Competitors include companies that
have substantially greater resources than we do, as well as
mutual companies and similar companies not subject to the
expenses and limitations imposed on publicly-held companies.
Competition is based on many factors including premiums charged,
terms and conditions of coverage, service provided, financial
ratings assigned by independent rating agencies, claims
services, reputation, perceived financial strength and the
experience of the organization in the line of business being
written. Increased competition could adversely affect our
ability to attract and retain business at current premium levels
and reduce the profits that would otherwise arise from
operations.
We
operate in a highly regulated environment.
Our insurance businesses are subject to extensive regulations by
state insurance authorities in each state in which they operate.
Regulation is intended for the benefit of the policyholders
rather than shareholders. In addition to limiting the amount of
dividend and other payments that can be made to our holding
company by our insurance subsidiaries, regulatory authorities
have broad administrative and supervisory authority relating to:
licensing requirements, trade practices, capital and surplus
requirements, investment practices and rates charged to our
customers. Regulatory authorities may also impose conditions on
terms of business or rate increases that we may desire to
enhance our operating results. In addition, we may incur
significant costs in complying with regulatory requests,
initiatives
and/or
requirements. Regulatory authorities generally also regulate
insurance holding companies in a variety of matters such as
placing limits on acquisitions, changes of control and the terms
of any affiliate transactions.
Our
revenues may fluctuate with insurance market conditions for
similar products.
We derive a significant portion of our insurance premium revenue
from Medicare supplement and moderately-sized commercial
property and casualty insurance policies. While we have in the
recent past been successful in implementing premium increases
which help improve our operating results, we believe that
competition from alternative government sponsored products and
pricing decisions from larger insurers will, at least in the
short term, result in more moderate pricing increases, if not
decreases in certain situations. Should our competitors become
less disciplined in their pricing, or more permissive in their
terms, we may lose customers who base their purchasing decisions
primarily on price because our policy is to price coverage
commensurate with the underlying risk. We cannot predict
whether, when or how market conditions will change, or the
manner in which, or the extent to which any such changes may
adversely impact the results of our operations.
Our
revenues and profitability may fluctuate with interest rates and
investment results.
We generally rely on the positive performance of our investment
portfolio to offset insurance losses and to contribute to our
profitability. As our investment portfolio is primarily
comprised of interest-earning assets, prevailing economic
conditions, particularly changes in market interest rates, may
significantly affect our operating results. Changes in interest
rates also can affect the value of our interest-earning assets,
which are principally comprised of fixed rate investment
securities. Generally, the values of fixed-rate investment
securities fluctuate inversely with changes in interest rates.
Interest rate fluctuations could adversely affect our
shareholders equity, income
and/or cash
flows. Further, to the extent fixed rate investment securities
consist of investments in other than government or government
agency securities, changing credit risk profiles may
significantly affect our operating results. The Company
generally carries investment securities at fair value; however,
if the value of an investment security declines below its cost
or amortized cost, and the decline is considered to be other
than temporary, a realized loss is recorded to reduce the
carrying value of the
19
investment to its estimated fair value. Realized losses are
reflected as a reduction in investment results and revenues and
could adversely impact our results of operations.
Our
operating results may be affected if incurred losses differ from
our loss reserve estimates.
Varying periods of time often elapse between the occurrence of
an insured loss, the reporting of the loss by the insured and
the ultimate settlement of that loss. The financial statement
recognition of unpaid incurred losses is made through a
provision for incurred losses with corresponding loss reserves
established. The loss reserves represent the estimate of amounts
needed to pay incurred losses and related loss adjustment
expense as of the balance sheet date. The process of estimating
loss reserves is a complex undertaking and involves significant
variables and judgments. Consideration is given to numerous
factors including, but not limited to: historical data; trends
in claim frequency and severity; changes in operations; emerging
economic, social, regulatory and legal trends and inflation.
Further, estimating loss reserves assumes that past experience,
adjusted for the effect of current developments and anticipated
trends, is an appropriate, but not always necessarily accurate,
basis for predicting future settlements. There is no precise
method for evaluating the impact of any specific factor on the
adequacy of loss reserves, and ultimate settlements will differ
from initial and regularly updated estimates. To the extent loss
reserves prove to be inadequate in the future, increases in loss
reserves would be necessitated with a corresponding charge to
earnings in the period the reserves are increased, which could
have a material adverse impact on our financial condition and
results of operations.
Rapidly
changing benefit costs could have a material impact on our
operations.
A significant portion of the Companys insurance policies
provide coverage for some portion of medical benefits
and/or
repair/replacement of damaged property such as buildings and
automobiles. Historical inflationary increases in those costs
are considered when developing premium rates; however, on
occasion, future cost increases exceed those initially
estimated. In the medical field, scientific breakthroughs
and/or new
technology can result in unanticipated increasing medical costs.
In property repair/replacement, a significant geographically
concentrated demand for labor and supplies, particularly as a
result of catastrophic disasters, may result in significantly
increased costs. Rapidly changing costs of settling claims in
excess of those originally anticipated, due to scientific
breakthrough, new technology
and/or
catastrophic events could have a material adverse impact on our
results of operations.
If
market conditions cause reinsurance to be more costly or
unavailable, we may be required to assume increased risk or
reduce the level of our underwriting commitments.
As part of our enterprise risk management strategy, we purchase
reinsurance for significant amounts of risk underwritten by our
insurance company subsidiaries. Market conditions beyond our
control determine the availability and cost of the reinsurance,
which may affect the level of our business and profitability. We
may be unable to maintain current reinsurance coverage or to
obtain other reinsurance coverage in adequate amounts and at
comparable rates in the future. If we are unable to renew our
expiring coverage or to obtain new reinsurance coverage, either
our net exposure to risk would increase, or if we were unwilling
to assume additional risk, we would have to reduce the amount of
our underwritten risk.
We
cannot guarantee that our reinsurers will pay in a timely
fashion, if at all, and, as a result, we could experience
losses.
We transfer some of our risks to reinsurance companies in
exchange for part of the premium we receive in connection with
the risk. Although reinsurance makes the reinsurer liable to us
to the extent the risk is transferred, it does not relieve us of
our liability to our policyholders. If reinsurers fail to pay us
or fail to pay on a timely basis, our financial results would be
adversely affected.
20
The
guaranty fund assessments that we are required to pay to state
guaranty associations may increase and results of operations and
financial condition could suffer as a result.
A majority of the states in which we operate have separate
insurance guaranty fund laws which require certain admitted
insurance companies doing business within their respective
jurisdictions to be a member of their guaranty associations.
These associations are organized to pay covered claims, as
defined, under insurance policies issued by insolvent insurance
companies. Most guaranty association laws enable the
associations to make assessments against member insurers to
obtain funds to pay covered claims after a member insurer
becomes insolvent. These associations levy assessments, up to
prescribed limits, on all member insurers in a particular state
on the basis of the proportionate share of the premiums written
by member insurers in the covered lines of business in that
state. Maximum assessments permitted by law in any one year are
generally subject to 4% of annual premiums written by a member
in that state. Some states permit member insurers to recover
assessments paid through surcharges on policyholders or through
full or partial premium tax offsets, while other states permit
recovery of assessments through the rate filing process. Our
policy is to accrue an estimated annual assessment based on the
most recent prior years experience. There is a significant
degree of uncertainty in estimating the liabilities relating to
an insolvent insurer due to inadequate financial data with
respect to the estate of the insolvent company as supplied by
the guaranty funds.
The
unpredictability of court decisions could have a material impact
on our operations.
From time to time we are party to legal proceedings that may
arise from disputes over our insurance coverage. The financial
position of our insurance subsidiaries may be affected by court
decisions that expand insurance coverage beyond the intention of
the insurer at the time it originally issued an insurance
policy. In addition, a significant jury award, or series of
awards, against one or more of our insureds could require us to
pay large sums of money in excess of our reserve amounts.
The
passage of tort reform or other legislation, and the subsequent
review of such laws by the courts, could have a material impact
on our operations.
Tort reforms generally restrict the ability of a plaintiff to
recover damages by, among other limitations, eliminating certain
claims that may be heard in a court, limiting the amount or
types of damages, changing statutes of limitations or the period
of time to make a claim, and limited venue or court selection. A
number of states in which we do business have enacted, or are
considering, tort reform legislation. Proposed federal tort
reform legislation has failed to win Congressional approval to
date. While the effects of tort reform would appear to be
beneficial to our business generally, there can be no assurance
that such reforms will be effective or ultimately upheld by the
courts in the various states. Further, if tort reforms are
effective, it could effectively increase the level of
competition for us in the markets in which we compete. In
addition, there can be no assurance that the benefits of tort
reform will not be accompanied by legislation or regulatory
actions that may be detrimental to our business. Furthermore,
insurance regulators might require premium rate limitations and
expanded coverage requirements as well as other requirements in
anticipation of the expected benefits of tort reform which may
or may not be actually realized.
The
geographic concentration of our regional property and casualty
operations ties our performance to the economic, regulatory and
demographic conditions of the southern United
States.
Our revenues and profitability are subject to prevailing
economic, regulatory, demographic and other conditions in the
states in which we write insurance. While our life and health
subsidiary writes insurance in numerous and diverse states, our
regional property and casualty subsidiaries write business in
the southern United States, which include New Mexico, Oklahoma,
Texas, Arkansas, Tennessee, Mississippi, Georgia, Florida,
Kentucky, and North and South Carolina (the Southern
States.) While we have limited exposures in the states of
Louisiana and Alabama, the Company does not actively solicit
business in those states. Further, even though the regional
property and casualty subsidiaries write business in these
eleven Southern States, there is a concentration of business in
the three states of Georgia, Mississippi and Texas, which have
potential coastal exposures. The Companys coastal
underwriting guidelines have been significantly revised in the
past
21
three years, thereby reducing the Companys future
exposure. While there can be no assurances with respect to
reduced losses as a result of future storms or natural
catastrophes, the concentration of business in these Southern
States does limit the opportunity for risk diversification and
exposes the Company to events which could result in a material
adverse effect.
Catastrophic
events could have a material adverse effect on our business,
consolidated operating results, financial condition
and/or
liquidity.
The Companys primary objective in managing risk is to
obtain diversification in the types and locations of business
written. In the property and casualty operations, modeling is
performed to evaluate the probable maximum loss that
may result from natural catastrophic events. There are however,
catastrophic events which may occur, the effects of which cannot
be reasonably estimated. In various Asian and European countries
there have been confirmed cases of H5N1 Avian Influenza in
birds. Individuals, primarily in Asia, have contracted the H5N1
Avian Influenza and although there are no cases which have been
reported in the United States, should such influenza reach
the United States and begin spreading via human transmission,
the impact on our life and health subsidiary is undeterminable.
Further, in the past three years but more particularly in 2005
and 2004, our property and casualty operations have sustained
losses from eight named hurricanes. Not only have
the hurricanes been costly due to the direct losses incurred by
the Companys insureds, but the Company has also been
subject to significant assessments from various state windstorm
facilities. Windstorm assessments from the states of Mississippi
and Florida during 2006, related to prior years
catastrophes, totaled approximately $2.4 million, of which
$0.03 million was absorbed by reinsurance. However, should
catastrophic windstorms continue, the direct losses resultant
therefrom, coupled with state windstorm assessments could result
in losses ultimately exceeding the Companys reinsurance
limits which occurred with respect to hurricane Katrina in 2005.
Additionally, the Company does not insure
high-profile individuals
and/or
locations and believes the risk of loss from future catastrophic
terrorist activities is remote. Each of these or other
catastrophic events, individually
and/or
collectively could ultimately however have a material adverse
effect on our business, consolidated operating results,
financial condition
and/or
liquidity.
If we
are unable to maintain favorable financial strength ratings, it
may be more difficult for us to write new business or renew our
existing business.
Our principal operating subsidiaries hold favorable financial
strength ratings from A.M. Best, an independent insurance
rating agency. Financial strength ratings are used by our agents
and customers as an important means of assessing the financial
strength and quality of various insurers. If our financial
position, or that of any of our individual subsidiaries, were to
deteriorate, we may not maintain our existing financial strength
ratings from the rating agency. A downgrade or withdrawal of any
such rating could limit or prevent us from writing
and/or
renewing desirable business which would materially adversely
impact our financial condition and results of operations.
Our
business could be adversely affected by the loss of independent
agents.
We depend in part on the services of independent agents and
brokers in the marketing of our insurance products. We face
competition from other insurance companies for the services and
allegiance of independent agents and brokers. These agents and
brokers may choose to direct business to competing insurance
companies or may direct less desirable risks to us.
Our
business could be adversely affected by the loss of one or more
key employees.
We are heavily dependent upon our senior management and the loss
of services of any of our senior executives could adversely
affect our business. Our success has been, and will continue to
be, dependent on our ability to retain the services of existing
key employees and to attract and retain additional qualified
personnel in the future. The loss of the services of key
employees or senior management, or the inability to identify,
hire and retain other highly qualified personnel in the future,
could adversely affect the quality and profitability of our
business operations.
22
We are
a holding company and are dependent on dividends and other
payments from our operating subsidiaries, which are subject to
dividend restrictions.
We are a holding company whose principal source of funds is cash
dividends and other permitted payments from operating
subsidiaries. If our subsidiaries are unable to make payments to
us, or are able to pay only limited amounts, we may be unable to
make payments on our indebtedness. The payment of dividends by
these operating subsidiaries is subject to restrictions set
forth in the insurance laws and regulations of their respective
states of domicile.
A
majority of our common stock is held directly and indirectly by
one family.
The Chairman of the Board of Directors of our Company and his
family, directly and indirectly, own slightly less than 2/3 of
the outstanding common stock of the Company. Accordingly, on
significantly all matters requiring a majority or greater
shareholder vote, our Chairman and his family effectively
control the vote. Such ownership effectively precludes any other
shareholder from acquiring any number of shares in an attempt to
exercise any degree of control over the Company. Further, as a
result of the significant ownership, the level of float of the
Companys stock on the NASDAQ market is minimal.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
Not applicable.
Leased Properties. The Company leases space
for its principal offices and for some of its insurance
operations in an office building located in Atlanta, Georgia,
from Delta Life Insurance Company under leases which expire at
various times through May 31, 2012. Under the current terms
of the leases, the Company occupies approximately
65,489 square feet of office space. Delta Life Insurance
Company, the owner of the building, is controlled by J. Mack
Robinson, Chairman of the Board of Directors and the largest
shareholder of the Company. The terms of the leases are believed
by Company management to be comparable to terms which could be
obtained by the Company from unrelated parties for comparable
rental property.
American Southern leases space for its office in a building
located in Atlanta, Georgia. The lease term expires
January 31, 2010. Under the terms of the lease, American
Southern occupies approximately 17,014 square feet.
Association Casualty leases space for its office in a building
located in Austin, Texas. The lease term expires April 30,
2011. Under the terms of the lease, Association Casualty
occupies 15,777 square feet.
Self Insurance Administrators, Inc. (SIA), a
non-insurance subsidiary of the Company, leases space for its
office in a building located in Duluth, Georgia. The lease term
expires March 31, 2008. Under the terms of the lease, SIA
occupies 2,266 square feet.
|
|
Item 3.
|
Legal
Proceedings
|
From time to time, the Company and its subsidiaries are involved
in various claims and lawsuits arising in the ordinary course of
business, both as a liability insurer defending third-party
claims brought against insureds and as an insurer defending
coverage claims brought against it. The Company accounts for
such exposures through the establishment of loss and loss
adjustment expense reserves. Subject to the uncertainties
inherent in litigation, management expects that the ultimate
liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for probable
losses and costs of defense, will not be material to the
Companys consolidated financial condition, although the
results of such litigation could be material to the consolidated
results of operations for any given period.
23
|
|
Item 4.
|
Submission
Of Matters To A Vote Of Security Holders
|
There were no matters submitted to a vote of the Companys
shareholders during the quarter ended December 31, 2006.
PART II
|
|
Item 5.
|
Market
For Registrants Common Equity, Related Shareholder Matters
And Issuer Purchases of Equity Securities
|
The Companys common stock is quoted on the Nasdaq Global
Market (Symbol: AAME). As of March 16, 2007, there were
4,158 shareholders of record. The following table sets
forth, for the periods indicated, the high and low sale prices
of the Companys common stock as reported on the Nasdaq
Global Market.
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
High
|
|
|
Low
|
|
|
2006
|
|
|
|
|
|
|
|
|
1st quarter
|
|
$
|
3.00
|
|
|
$
|
2.52
|
|
2nd quarter
|
|
|
3.45
|
|
|
|
2.69
|
|
3rd quarter
|
|
|
3.15
|
|
|
|
2.25
|
|
4th quarter
|
|
|
3.86
|
|
|
|
2.24
|
|
2005
|
|
|
|
|
|
|
|
|
1st quarter
|
|
$
|
3.27
|
|
|
$
|
2.95
|
|
2nd quarter
|
|
|
3.15
|
|
|
|
2.80
|
|
3rd quarter
|
|
|
3.06
|
|
|
|
2.50
|
|
4th quarter
|
|
|
3.00
|
|
|
|
2.50
|
|
The Company has not paid dividends to its common shareholders
since the fourth quarter of 1988. The Company has elected to
retain its earnings to grow its business and does not anticipate
paying cash dividends on its common stock in the foreseeable
future. Payment of dividends in the future will be at the
discretion of the Companys Board of Directors and will
depend upon the financial condition, capital requirements,
earnings of the Company, any restrictions contained in any
agreements by which the Company is bound, as well as other
factors as the Board of Directors may deem relevant. The
Companys primary sources of cash for the payment of
dividends are dividends from its subsidiaries. Under the
insurance codes of the state of jurisdiction under which each
insurance subsidiary operates, dividend payments to the Company
by its insurance subsidiaries without the prior approval of the
Insurance Commissioner of the applicable state, are limited to
the greater of 10% of statutory surplus or statutory net income
of such subsidiary before recognizing realized investment gains.
At December 31, 2006, Georgia Casualty had
$23.4 million of statutory surplus, American Southern had
$34.9 million of statutory surplus, Association Casualty
had $21.7 million of statutory surplus, and Bankers
Fidelity Life had $34.5 million of statutory surplus.
24
Equity
Compensation Plan Information
The following table sets forth, as of December 31, 2006,
the number of securities outstanding under the Companys
equity compensation plans, the weighted average exercise price
of such securities and the number of securities remaining
available for grant under these plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
securities
|
|
|
|
|
|
|
|
|
|
remaining available
|
|
|
|
Number of
|
|
|
|
|
|
for future issuance
|
|
|
|
securities to be
|
|
|
|
|
|
under equity
|
|
|
|
issued upon
|
|
|
Weighted-average
|
|
|
compensation plans
|
|
|
|
exercise of
|
|
|
exercise price of
|
|
|
(excluding
|
|
|
|
outstanding
|
|
|
outstanding
|
|
|
securities
|
|
|
|
options, warrants
|
|
|
options, warrants
|
|
|
reflected in the
|
|
Plan Category
|
|
and rights
|
|
|
and rights
|
|
|
first column)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
646,500
|
|
|
$
|
1.44
|
|
|
|
2,486,491
|
|
Equity compensation plans not
approved by security holders
|
|
|
(1
|
)
|
|
|
|
(1)
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
646,500
|
|
|
$
|
1.44
|
|
|
|
2,486,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
All the Companys equity compensation plans have been
approved by the Companys shareholders. |
Issuer
Purchases of Equity Securities
On May 2, 1995, the Board of Directors of the Company
approved an initial plan that allowed for the repurchase of
shares of the Companys common stock (the Repurchase
Plan). As amended since its original adoption, the
Repurchase Plan currently allows for repurchases of up to an
aggregate of 2.0 million shares of the Companys
common stock on the open market or in privately negotiated
transactions, as determined by an authorized officer of the
Company. Such purchases can be made from time to time in
accordance with applicable securities laws and other
requirements.
Other than pursuant to the Repurchase Plan, no purchases of
common stock of the Company were made by or on behalf of the
Company during the periods described below.
The table below sets forth information regarding repurchases by
the Company of shares of its common stock on a monthly basis
during the three months ended December 31, 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
Shares That May Yet
|
|
|
|
Total Number
|
|
|
Average
|
|
|
Part of Publicly
|
|
|
Be Purchased Under
|
|
|
|
of Shares
|
|
|
Price Paid
|
|
|
Announced Plans or
|
|
|
the Plans or
|
|
Period
|
|
Purchased
|
|
|
Per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
October 1
October 31, 2006
|
|
|
75
|
|
|
$
|
2.60
|
|
|
|
75
|
|
|
|
576,931
|
|
November 1
November 30, 2006
|
|
|
125
|
|
|
|
2.77
|
|
|
|
125
|
|
|
|
576,806
|
|
December 1
December 31, 2006
|
|
|
16,957
|
|
|
|
2.85
|
|
|
|
16,957
|
|
|
|
559,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,157
|
|
|
$
|
2.85
|
|
|
|
17,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25
Performance
Graph
The graph below compares the cumulative total return to
shareholders on the Companys common stock for the period
from December 31, 2001 through December 31, 2006, with
(i) the Russell 2000 Index, (ii) the Nasdaq Insurance
Index, and (iii) a previously selected peer group of
insurance companies (the Insurance Peer Group).
Assumes $100 invested at the close of trading in 12/2001 in
Atlantic American common stock, the Russell 2000 Index, the
NASDAQ Insurance Index and the Insurance Peer Group.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
|
2002
|
|
|
|
2003
|
|
|
|
2004
|
|
|
|
2005
|
|
|
|
2006
|
|
Atlantic American
|
|
|
$
|
100.00
|
|
|
|
$
|
74.09
|
|
|
|
$
|
136.36
|
|
|
|
$
|
140.91
|
|
|
|
$
|
122.73
|
|
|
|
$
|
134.55
|
|
Russell 2000 Index
|
|
|
$
|
100.00
|
|
|
|
$
|
98.14
|
|
|
|
$
|
101.68
|
|
|
|
$
|
121.80
|
|
|
|
$
|
133.07
|
|
|
|
$
|
149.19
|
|
NASDAQ Insurance Index
|
|
|
$
|
100.00
|
|
|
|
$
|
78.42
|
|
|
|
$
|
114.00
|
|
|
|
$
|
133.38
|
|
|
|
$
|
137.81
|
|
|
|
$
|
161.24
|
|
Insurance Peer Group
|
|
|
$
|
100.00
|
|
|
|
$
|
73.24
|
|
|
|
$
|
85.56
|
|
|
|
$
|
124.02
|
|
|
|
$
|
159.72
|
|
|
|
$
|
208.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Factual
material is obtained from sources believed to be reliable, but
the publisher is not responsible for any errors or omissions
contained herein.
|
Source:
Value Line, Inc. and Nasdaq
|
Insurance Peer Group includes: American Safety Insurance Group
Ltd., Donegal Insurance Group J, National Security Group, Inc.,
Meadowbrook Insurance Group, Inc., Horace Mann Educators Corp.,
Unico American Corp. and Covanta Holding Group.
26
|
|
Item 6.
|
Selected
Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
|
(In thousands, except per share data)
|
|
|
Insurance premiums
|
|
$
|
153,705
|
|
|
$
|
177,593
|
|
|
$
|
170,860
|
|
|
$
|
154,712
|
|
|
$
|
154,499
|
|
Investment income
|
|
|
18,323
|
|
|
|
16,685
|
|
|
|
15,860
|
|
|
|
15,628
|
|
|
|
14,011
|
|
Other income
|
|
|
813
|
|
|
|
1,263
|
|
|
|
1,183
|
|
|
|
900
|
|
|
|
1,148
|
|
Realized investment gains
(losses), net(1)
|
|
|
6,691
|
|
|
|
(10,456
|
)
|
|
|
2,199
|
|
|
|
360
|
|
|
|
587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
179,532
|
|
|
|
185,085
|
|
|
|
190,102
|
|
|
|
171,600
|
|
|
|
170,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses
incurred
|
|
|
91,932
|
|
|
|
115,676
|
|
|
|
113,077
|
|
|
|
102,343
|
|
|
|
109,109
|
|
Other expenses
|
|
|
76,311
|
|
|
|
76,874
|
|
|
|
72,704
|
|
|
|
62,732
|
|
|
|
58,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
168,243
|
|
|
|
192,550
|
|
|
|
185,781
|
|
|
|
165,075
|
|
|
|
167,142
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
and cumulative effect of change in accounting principle
|
|
|
11,289
|
|
|
|
(7,465
|
)
|
|
|
4,321
|
|
|
|
6,525
|
|
|
|
3,103
|
|
Income tax expense (benefit)
|
|
|
2,353
|
|
|
|
(4,290
|
)
|
|
|
(696
|
)
|
|
|
(319
|
)
|
|
|
(498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
|
8,936
|
|
|
|
(3,175
|
)
|
|
|
5,017
|
|
|
|
6,844
|
|
|
|
3,601
|
|
Cumulative effect of change in
accounting principle(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,816
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,936
|
|
|
$
|
(3,175
|
)
|
|
$
|
5,017
|
|
|
$
|
6,844
|
|
|
$
|
(12,215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
$
|
.36
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
$
|
.26
|
|
|
$
|
.10
|
|
Cumulative effect of change in
accounting principle(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.74
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
.36
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
$
|
.26
|
|
|
$
|
(.64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before cumulative
effect of change in accounting principle
|
|
$
|
.33
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
$
|
.25
|
|
|
$
|
.10
|
|
Cumulative effect of change in
accounting principle(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.73
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
.33
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
$
|
.25
|
|
|
$
|
(.63
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible book value per common
share(3)
|
|
$
|
3.30
|
|
|
$
|
3.00
|
|
|
$
|
3.42
|
|
|
$
|
3.30
|
|
|
$
|
2.79
|
|
Common shares outstanding
|
|
|
21,481
|
|
|
|
21,383
|
|
|
|
21,213
|
|
|
|
21,199
|
|
|
|
21,374
|
|
Total assets
|
|
$
|
458,632
|
|
|
$
|
460,417
|
|
|
$
|
470,511
|
|
|
$
|
443,552
|
|
|
$
|
421,524
|
|
Total long-term debt
|
|
$
|
52,988
|
|
|
$
|
49,738
|
|
|
$
|
51,488
|
|
|
$
|
53,238
|
|
|
$
|
48,042
|
|
Total debt
|
|
$
|
53,988
|
|
|
$
|
51,488
|
|
|
$
|
53,238
|
|
|
$
|
56,238
|
|
|
$
|
50,042
|
|
Total shareholders equity
|
|
$
|
94,188
|
|
|
$
|
80,453
|
|
|
$
|
88,960
|
|
|
$
|
86,893
|
|
|
$
|
78,540
|
|
|
|
|
(1) |
|
Includes a $10,709 impairment charge in 2005 for automotive
sector fixed maturity investments. See Note 2 of Notes to
Consolidated Financial Statements. |
|
(2) |
|
Represents a cumulative effect of change in accounting principle
with respect to the adoption of Statement of Financial
Accounting Standards No. 142 regarding goodwill. |
|
(3) |
|
Excludes goodwill. |
27
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following is managements discussion and analysis of
the financial condition and results of operations of Atlantic
American Corporation (Atlantic American or the
Parent) and its subsidiaries (collectively, the
Company) for each of the three years in the period
ended December 31, 2006. This discussion should be read in
conjunction with the consolidated financial statements and notes
thereto included elsewhere herein.
Atlantic American is an insurance holding company whose
operations are conducted through a group of regional insurance
companies: American Southern Insurance Company and American
Safety Insurance Company (together known as American
Southern); Association Casualty Insurance Company and
Association Risk Management General Agency, Inc. (together known
as Association Casualty); Georgia
Casualty & Surety Company (Georgia
Casualty); and Bankers Fidelity Life Insurance Company
(Bankers Fidelity). Each operating company is
managed separately based upon the geographic location or the
type of products offered and is evaluated on its individual
performance. Management has conformed information systems,
policies and procedures, products, marketing and managerial
responsibilities between Association Casualty and Georgia
Casualty to create a southern regional property and
casualty operation and increase efficiencies.
Critical
Accounting Policies
The accounting and reporting policies of the Company are in
accordance with accounting principles generally accepted in the
United States of America and, in managements belief,
conform to general practices within the insurance industry. The
following is an explanation of the Companys accounting
policies and the resultant estimates considered most significant
by management. These accounting policies inherently require
significant judgment and assumptions and actual operating
results could differ from managements initial estimates
determined using these policies. Atlantic American does not
expect that changes in the estimates determined using these
policies will have a material effect on the Companys
financial condition or liquidity, although changes could have a
material effect on its consolidated results of operations.
Unpaid loss and loss adjustment expenses comprised 45% of
the Companys liabilities at December 31, 2006. This
obligation includes estimates for: 1) unpaid losses on
claims reported prior to December 31, 2006,
2) development on those reported claims, 3) unpaid
ultimate losses on claims incurred prior to December 31,
2006 but not yet reported and 4) unpaid loss adjustment
expenses for reported and unreported claims incurred prior to
December 31, 2006. Quantification of loss estimates for
each of these components involves a significant degree of
judgment and estimates may vary, materially, from period to
period. Estimated unpaid losses on reported claims are developed
based on historical experience with similar claims by the
Company. Development on reported claims, estimates of unpaid
ultimate losses on claims incurred prior to December 31,
2006 but not yet reported, and estimates of unpaid loss
adjustment expenses, are developed based on the Companys
historical experience, using actuarial methods to assist in the
analysis. The Companys actuarial staff develops ranges of
estimated development on reported and unreported claims as well
as loss adjustment expenses using various methods including the
paid-loss development method, the reported-loss development
method, the paid Bornhuetter-Ferguson method, the reported
Bornhuetter-Ferguson method, the Berquist-Sherman method and a
frequency-severity method. Any single method used to estimate
ultimate losses has inherent advantages and disadvantages due to
the trends and changes affecting the business environment and
the Companys administrative policies. Further, a variety
of external factors, such as legislative changes, medical cost
inflation, and others may directly or indirectly impact the
relative adequacy of liabilities for unpaid losses and loss
adjustment expenses. The Companys approach is to select an
estimate of ultimate losses based on comparing results of a
variety of reserving methods, as opposed to total reliance on
any single method. Unpaid loss and loss adjustment expenses are
reviewed periodically for significant lines of business, and
when current results differ from the original assumptions used
to develop such estimates, the amount of the Companys
recorded liability for unpaid loss and loss adjustment expenses
is adjusted. In the event the Companys actual reported
losses in any period are materially in excess of the previous
estimated amounts, such losses, to the extent reinsurance
coverage does not exist, would have a material adverse effect on
the Companys results of operations.
28
Future policy benefits comprised 14% of the
Companys total liabilities at December 31, 2006.
These liabilities relate primarily to life insurance products
and are based upon assumed future investment yields, mortality
rates, and withdrawal rates after giving effect to possible
risks of adverse deviation. The assumed mortality and withdrawal
rates are based upon the Companys experience. If actual
results differ from the initial assumptions, the amount of the
Companys recorded liability could require adjustment.
Deferred acquisition costs comprised 5% of the
Companys total assets at December 31, 2006. Deferred
acquisition costs are commissions, premium taxes, and other
costs that vary with and are primarily related to the
acquisition of new and renewal business and are generally
deferred and amortized. The deferred amounts are recorded as an
asset on the balance sheet and amortized to expense in a
systematic manner. Traditional life insurance and long-duration
health insurance deferred policy acquisition costs are amortized
over the estimated premium-paying period of the related policies
using assumptions consistent with those used in computing the
related liability for policy benefit reserves. The deferred
acquisition costs for property and casualty insurance and
short-duration health insurance are amortized over the effective
period of the related insurance policies. Deferred policy
acquisition costs are expensed when such costs are deemed not to
be recoverable from future premiums (for traditional life and
long-duration health insurance) and from the related unearned
premiums and investment income (for property and casualty and
short-duration health insurance). Assessments of recoverability
for property and casualty and short-duration health insurance
are extremely sensitive to the estimates of a subsequent
years projected losses related to the unearned premiums.
Projected loss estimates for a current block of business for
which unearned premiums remain to be earned may vary
significantly from the indicated losses incurred in any given
previous calendar year.
Receivables are amounts due from reinsurers, insureds and
agents and comprised 20% of the Companys total assets at
December 31, 2006. Insured and agent balances are evaluated
periodically for collectibility. Annually, the Company performs
an analysis of the credit worthiness of the Companys
reinsurers using various data sources. Failure of reinsurers to
meet their obligations due to insolvencies or disputes could
result in uncollectible amounts and losses to the Company.
Allowances for uncollectible amounts are established, as and
when a loss has been determined probable, against the related
receivable. Losses are recognized when determined on a specific
account basis and a general provision for loss is made based on
the Companys historical experience.
Cash and investments comprised 71% of the Companys
total assets at December 31, 2006. Substantially all
investments are in bonds and common and preferred stocks, which
are subject to significant market fluctuations. The Company
carries all investments as available for sale and, accordingly,
at their estimated fair values. The Company owns certain
non-redeemable preferred stocks that do not have quoted values
and are carried at estimated fair values as determined by
management. Such values inherently involve a greater degree of
judgment and uncertainty and therefore ultimately greater price
volatility. On occasion, the value of an investment may decline
to a value below its amortized purchase price and remain at such
value for an extended period of time. When an investments
indicated fair value has declined below its cost basis for a
period of time, primarily due to changes in credit risk, the
Company evaluates such investment for other than a temporary
impairment. If other than a temporary impairment is deemed to
exist, then the Company will write down the amortized cost basis
of the investment to its estimated fair value. While such write
down does not impact the reported value of the investment in the
Companys balance sheet, it is reflected as a realized
investment loss in the Companys consolidated statements of
operations.
Deferred income taxes comprised approximately 1% of the
Companys total assets at December 31, 2006. Deferred
income taxes reflect the effect of temporary differences between
assets and liabilities that are recognized for financial
reporting purposes and the amounts that are recognized for tax
purposes. These deferred income taxes are measured by applying
currently enacted tax laws and rates. Valuation allowances are
recognized to reduce the deferred tax assets to the amount that
is more likely than not to be realized. In assessing the
likelihood of realization, management considers estimates of
future taxable income and tax planning strategies.
29
Refer to Note 1 of Notes to Consolidated Financial
Statements for details regarding the Companys
significant accounting policies.
Overall
Corporate Results
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
American Southern
|
|
$
|
56,592
|
|
|
$
|
52,925
|
|
|
$
|
53,277
|
|
Association Casualty
|
|
|
25,899
|
|
|
|
22,626
|
|
|
|
25,278
|
|
Georgia Casualty
|
|
|
28,274
|
|
|
|
40,480
|
|
|
|
39,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty
|
|
|
110,765
|
|
|
|
116,031
|
|
|
|
117,601
|
|
Life and Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
|
67,444
|
|
|
|
68,255
|
|
|
|
71,369
|
|
Corporate and Other
|
|
|
1,323
|
|
|
|
799
|
|
|
|
1,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
179,532
|
|
|
$
|
185,085
|
|
|
$
|
190,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income
taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and Casualty:
|
|
|
|
|
|
|
|
|
|
|
|
|
American Southern
|
|
$
|
10,624
|
|
|
$
|
4,765
|
|
|
$
|
8,024
|
|
Association Casualty
|
|
|
3,907
|
|
|
|
1,342
|
|
|
|
2,094
|
|
Georgia Casualty
|
|
|
(2,243
|
)
|
|
|
(8,191
|
)
|
|
|
(5,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total property and casualty
|
|
|
12,288
|
|
|
|
(2,084
|
)
|
|
|
4,655
|
|
Life and Health:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bankers Fidelity
|
|
|
6,755
|
|
|
|
2,208
|
|
|
|
5,863
|
|
Corporate and Other
|
|
|
(7,754
|
)
|
|
|
(7,589
|
)
|
|
|
(6,197
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income (loss) before income
taxes
|
|
$
|
11,289
|
|
|
$
|
(7,465
|
)
|
|
$
|
4,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,936
|
|
|
$
|
(3,175
|
)
|
|
$
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On a consolidated basis, the Company had net income of
$8.9 million, or $0.33 per diluted share, in 2006,
compared to a net loss of $3.2 million, or $0.21 per
diluted share, in 2005. The net loss for 2005 was primarily the
result of a non-cash charge of $10.7 million
($7.0 million after taxes) to reflect the write down in the
value of General Motors Corporation (GM), General
Motors Acceptance Corporation (GMAC), and Ford Motor
Credit Company (Ford) fixed maturity investments
owned by the Company due to an other than temporary impairment.
Net income was $5.0 million, or $0.18 per diluted
share, in 2004. Total revenue for 2006 decreased
$5.6 million, or 3.0%, to $179.5 million from
$185.1 million in 2005. Premium revenue for 2006 decreased
$23.9 million, or 13.5%, from 2005. The decrease in
premiums was primarily attributable to increased pricing
competition on most property and casualty lines, the non-renewal
of targeted classes of property business as well as the
reassessment of coastal property exposures in the Companys
property and casualty operations, the latter two of which began
in late 2005. The Companys life and health operations have
also experienced a premium decline resulting from lower new
sales activity and an increased level of product competition,
specifically in the Medicare supplement market. Total revenue
for 2005 decreased $5.0 million, or 2.6%, to
$185.1 million from $190.1 million in 2004. Excluding
the impairment charge discussed previously, total revenue in
2005 increased $5.7 million, or 3.0%, over 2004. The
increase was primarily due to increased volume in the general
liability and surety lines of business at American Southern as
well as increased volume written in 2004 at Georgia Casualty,
the majority of which was earned in 2005. Premium revenue for
2005 increased $6.7 million, or 3.9%, over 2004. Insurance
premiums are earned ratably
30
over the policy term, and therefore premiums earned in 2005 are
related to policies written during both 2004 and 2005. The
increase in net income during 2006 over 2005 was primarily due
to the non-recurrence of the automotive sector investment
impairment discussed previously. In 2006, the Company had net
realized investment gains of $6.7 million compared to net
realized investment losses of $10.5 million in 2005 and net
realized investment gains of $2.2 million in 2004. The
$6.7 million in net realized investment gains in 2006 was
primarily due to the sale of a portion of the Companys
automotive sector investments (bonds of GM and Ford), a portion
of the Companys investment in equity securities of
Wachovia Corporation, and the sale of a real estate partnership
interest. In addition, during 2006, net income increased by a
$0.6 million deferred income tax benefit, compared to
$0.1 million and $1.3 million deferred income tax
benefits in 2005 and 2004, repectively, all of which related to
adjustments to the Companys income tax valuation
allowance. The adjustments to the valuation allowance were the
result of the annual reassessment of the realization of net
operating loss carryforwards. Net income for 2006 as compared to
2005 was negatively impacted by a significant windstorm
assessment related to hurricane Katrina. In April 2006, the
Company received an assessment from the Mississippi Windstorm
Underwriting Association of approximately $2.2 million
which was in addition to a $1.3 million assessment which
had been previously received and paid in 2005. The April 2006
assessment exhausted the Companys remaining
$0.03 million of catastrophe reinsurance related to
hurricane Katrina, and the Company expensed the
$2.2 million excess amount. The decrease in 2005 net
income from 2004 was also primarily due to the automotive sector
investment impairment. In addition, during 2005, the Company
experienced a significant increase in both the frequency and
severity of claims in its property and casualty operations,
primarily from fires, fatalities, tornados, and hurricanes,
which did not recur in 2006. Further, during 2005, the Company
was directly impacted by four hurricanes, Dennis, Katrina, Rita
and Wilma, all of which resulted in net hurricane related
expenses, before consideration of subsequent state assessments
directly related thereto, of $2.3 million in the property
and casualty operations, compared to a comparable
$3.8 million incurred during 2004. The Companys 2004
financial results were directly impacted by insured losses
caused by four hurricanes, Charlie, Frances, Ivan, and Jeanne,
all of which inflicted substantial damage, primarily in Florida.
The Companys property and casualty operations are
comprised of American Southern, Association Casualty, and
Georgia Casualty. The Companys life and health operations
are comprised of the operations of Bankers Fidelity.
A more detailed analysis of the individual operating entities
and other corporate activities is provided in the following
discussion.
31
Underwriting
Results
American
Southern
The following table summarizes, for the periods indicated,
American Southerns premiums, losses, expenses and
underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Gross written premiums
|
|
$
|
55,539
|
|
|
$
|
62,081
|
|
|
$
|
60,278
|
|
Ceded premiums
|
|
|
(9,265
|
)
|
|
|
(9,099
|
)
|
|
|
(9,268
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$
|
46,274
|
|
|
$
|
52,982
|
|
|
$
|
51,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
50,659
|
|
|
$
|
51,447
|
|
|
$
|
48,062
|
|
Net losses and loss adjustment
expenses
|
|
|
23,440
|
|
|
|
24,827
|
|
|
|
24,795
|
|
Underwriting expenses
|
|
|
22,528
|
|
|
|
23,333
|
|
|
|
20,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income
|
|
$
|
4,691
|
|
|
$
|
3,287
|
|
|
$
|
2,809
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
46.3
|
%
|
|
|
48.2
|
%
|
|
|
51.6
|
%
|
Expense ratio
|
|
|
44.4
|
|
|
|
45.4
|
|
|
|
42.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
90.7
|
%
|
|
|
93.6
|
%
|
|
|
94.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums at American Southern decreased
$6.5 million, or 10.5%, during 2006 as compared to 2005.
The decrease in gross written premiums was primarily due to the
cancellation of several commercial programs, including the
low-value dwelling property business in the second half of 2005
and the joint venture with AAA Carolinas to market automobile
insurance to club members, which was terminated on
October 1, 2005. Also contributing to the decrease in gross
written premiums was the termination of the relationship with
one of the companys agents who had previously produced
approximately $1.6 million in annualized general liability
business. Partially offsetting this decrease in gross written
premiums were increased business writings in the surety line of
business.
Ceded premiums increased $0.2 million, or 1.8%, during 2006
as compared to 2005. The increase in ceded premiums was due to
changes in certain provisions in the companys reinsurance
treaty agreements relating to certain accounts.
Gross written premiums at American Southern increased
$1.8 million, or 3.0%, during 2005 as compared to 2004. The
increase in premiums was primarily attributable to increased
business writings in the surety line of business. American
Southerns surety bond program, which began to increase
production levels in the second half of 2004, generated
$10.1 million in gross written premiums during 2005
compared to $6.3 million in 2004, a $3.8 million
increase. Partially offsetting this increase was the loss of
several large commercial automobile liability accounts and the
withdrawal from the low-value dwelling property business, all of
which had contributed approximately $2.9 million in written
premiums during 2004.
Ceded premiums decreased $0.2 million, or 1.8%, during 2005
as compared to 2004. The decrease in ceded premiums was
primarily due to the increased volume of surety business, which
is not subject to reinsurance.
32
The following table summarizes, for the periods indicated,
American Southerns earned premiums by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Automobile liability
|
|
$
|
16,163
|
|
|
$
|
16,723
|
|
|
$
|
18,944
|
|
Automobile physical damage
|
|
|
9,698
|
|
|
|
11,002
|
|
|
|
11,187
|
|
General liability
|
|
|
11,394
|
|
|
|
11,767
|
|
|
|
10,102
|
|
Property
|
|
|
3,186
|
|
|
|
3,692
|
|
|
|
3,862
|
|
Surety
|
|
|
10,218
|
|
|
|
8,263
|
|
|
|
3,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premium
|
|
$
|
50,659
|
|
|
$
|
51,447
|
|
|
$
|
48,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums decreased $0.8 million, or 1.5%, during
2006 from 2005 due primarily to the decline in written premiums
discussed previously.
Net earned premiums increased $3.4 million, or 7.0%, during
2005 over 2004 due primarily to the increased business writings
in the general liability and surety lines of business in 2004
and 2005. Insurance premiums are earned ratably over the policy
term, and therefore premiums earned in 2005 are related to
policies written during both 2004 and 2005.
The performance of an insurance company is often measured by the
combined ratio. The combined ratio represents the percentage of
losses, loss adjustment expenses and other expenses that are
incurred for each dollar of premium earned by the company. A
combined ratio of under 100% represents an underwriting profit
while a combined ratio of over 100% indicates an underwriting
loss. The combined ratio is divided into two components, the
loss ratio (the ratio of losses and loss adjustment expenses
incurred to premiums earned) and the expense ratio (the ratio of
expenses incurred to premiums earned).
The combined ratio for American Southern decreased to 90.7% in
2006 from a combined ratio of 93.6% in 2005. The loss ratio
decreased to 46.3% in 2006 from 48.2% in 2005. The decrease in
the loss ratio was primarily attributable to the cancellation of
several commercial programs, including the low-value dwelling
property business, combined with favorable loss experience in
the commercial automobile line of business. The expense ratio
decreased to 44.4% in 2006 from 45.4% in 2005 due primarily to
lower profit margins on the business with variable commissions.
Approximately 88% of American Southerns business provides
for contractual commission arrangements, which compensate the
companys agents in relation to the loss ratios of the
business they write. By structuring its business in this manner,
American Southern provides its agents with an economic incentive
to place profitable business with American Southern.
The combined ratio for American Southern decreased to 93.6% in
2005 from a combined ratio of 94.2% in 2004. The loss ratio
decreased to 48.2% in 2005 from 51.6% in 2004. The increased
focus on new business writings in the general liability and
surety lines of business resulted in a decrease in the 2005 loss
ratio due to favorable loss experience in those lines of
business. Also, during 2004, American Southern incurred, and its
loss ratio was impacted by, $1.0 million in hurricane
related expenses, which did not recur in 2005. The expense ratio
for 2005 increased to 45.4% from 42.6% in 2004. The increase in
the expense ratio for 2005 was primarily due to American
Southerns business structure, which compensates agents in
relation to the profitability of business they write. In
addition, in 2005 American Southern experienced an increase in
acquisition costs associated with new programs and accounts
underwritten. As a percentage of gross written premiums, net
fixed commissions increased to 16.5% in 2005 from 16.3% in 2004.
Total commissions (fixed plus variable) increased to 27.6% in
2005 from 26.3% in 2004.
33
Association
Casualty
The following table summarizes, for the periods indicated,
Association Casualtys premiums, losses, expenses and
underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Direct written premiums(1)
|
|
$
|
35,331
|
|
|
$
|
25,077
|
|
|
$
|
22,322
|
|
Assumed written premiums(2)
|
|
|
67
|
|
|
|
745
|
|
|
|
5,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross written premiums
|
|
|
35,398
|
|
|
|
25,822
|
|
|
|
28,235
|
|
Ceded premiums(1)
|
|
|
(10,604
|
)
|
|
|
(5,685
|
)
|
|
|
(4,703
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$
|
24,794
|
|
|
$
|
20,137
|
|
|
$
|
23,532
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
22,908
|
|
|
$
|
20,972
|
|
|
$
|
22,681
|
|
Net losses and loss adjustment
expenses
|
|
|
10,029
|
|
|
|
12,410
|
|
|
|
13,785
|
|
Underwriting expenses
|
|
|
11,963
|
|
|
|
8,874
|
|
|
|
9,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting income (loss)
|
|
$
|
916
|
|
|
$
|
(312
|
)
|
|
$
|
(503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
43.8
|
%
|
|
|
59.2
|
%
|
|
|
60.8
|
%
|
Expense ratio
|
|
|
52.2
|
|
|
|
42.3
|
|
|
|
41.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
96.0
|
%
|
|
|
101.5
|
%
|
|
|
102.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes $16.2 million and $22.2 million in written
premiums ceded to Georgia Casualty in 2005 and 2004,
respectively. |
|
(2) |
|
Written premiums of $0.7 million in 2005 and
$5.9 million in 2004 assumed from Georgia Casualty under a
quota share reinsurance agreement and eliminated in
consolidation. This agreement was terminated effective
August 31, 2005. |
Gross written premiums at Association Casualty increased
$9.6 million, or 37.1%, during 2006 as compared to 2005.
The increase in gross written premiums was primarily due to the
additional premiums retained as a result of the mutual agreement
not to enforce a separate reinsurance agreement between
Association Casualty and Georgia Casualty. During 2005,
Association Casualty had ceded $16.2 million in direct
written premiums to Georgia Casualty under this agreement.
Effective September 1, 2005, Association Casualty, ceased
ceding any portion of its business to Georgia Casualty.
Ceded premiums at Association Casualty increased
$4.9 million, or 86.5%, during 2006 as compared to 2005.
Excluding catastrophe reinsurance rates, which increased 117.0%
in 2006 over 2005, general reinsurance rates increased 7.9%
during 2006 as compared to 2005. In addition to the overall
increase in reinsurance rates, the increase in ceded premiums
was also due to the increase in retained business and the risk
characteristics related thereto. Prior to September 1,
2005, the business underwritten by Georgia Casualty on behalf of
Association Casualty was ceded 100% to Georgia Casualty rather
than to a third party reinsurer. As a result of the third party
cessions in 2006, ceded premiums increased correspondingly.
Gross written premiums at Association Casualty decreased
$2.4 million, or 8.5%, during 2005 as compared to 2004. The
decrease in gross written premiums was primarily attributable to
the termination of the quota share reinsurance agreement with
Georgia Casualty in 2005. In addition, Association Casualty
experienced an increased level of price competition in the Texas
marketplace resulting in a decline in Texas direct written
premiums. Direct written premiums in other Southeastern states
partially offset declines in Texas direct written premiums.
Ceded premiums at Association Casualty increased
$1.0 million, or 20.9%, during 2005 as compared to 2004.
Excluding assumed written premiums of $0.7 million and
$5.9 million in 2005 and 2004, respectively, that were not
subject to reinsurance, premiums ceded as a percentage of direct
written premiums increased to
34
22.7% in 2005 from 21.1% in 2004 primarily due to rate increases
on certain reinsured loss layers as well as changes in retention
rates and coverage limits.
The following table summarizes, for the periods indicated,
Association Casualtys earned premiums by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Workers compensation
|
|
$
|
8,374
|
|
|
$
|
9,613
|
|
|
$
|
11,357
|
|
Business automobile
|
|
|
4,899
|
|
|
|
4,265
|
|
|
|
4,119
|
|
General liability
|
|
|
1,027
|
|
|
|
350
|
|
|
|
558
|
|
Property
|
|
|
8,608
|
|
|
|
6,744
|
|
|
|
6,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premium
|
|
$
|
22,908
|
|
|
$
|
20,972
|
|
|
$
|
22,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums increased $1.9 million, or 9.2%, during
2006 as compared to 2005. The increase in net earned premiums
was primarily due to a higher level of premium volume written
and retained during 2006 and 2005, the majority of which is
reflected as earned in 2006. Insurance premiums are earned
ratably over the policy term, and therefore premiums earned in
2006 are related to premiums written during both 2005 and 2006.
Net earned premiums decreased $1.7 million, or 7.5%, during
2005 as compared to 2004 primarily due to the termination of the
quota share reinsurance agreement discussed previously.
The combined ratio for Association Casualty decreased to 96.0%
in 2006 from 101.5% in 2005. The loss ratio decreased to 43.8%
in 2006 from 59.2% in 2005. The decrease in the loss ratio was
due to several factors. During 2005, Association Casualty
incurred losses and loss adjustment expenses of
$0.7 million in connection with the quota share reinsurance
agreement with Georgia Casualty. This quota share reinsurance
agreement was terminated in 2005 and, accordingly, no such
losses were incurred in 2006. Also during 2005, Association
Casualtys loss ratio was negatively impacted by an
increasing number of construction defect claims on liability
policies, which did not recur in 2006. In addition, Association
Casualty experienced favorable loss development during 2006,
which also contributed to the decrease in the loss ratio. The
expense ratio increased to 52.2% in 2006 from 42.3% in 2005. The
increase in the expense ratio was primarily due to an increased
share of allocated underwriting expenses that were directly
related to the additional retained business that had previously
been ceded to Georgia Casualty.
The combined ratio for Association Casualty decreased to 101.5%
in 2005 from 102.2% in 2004. The loss ratio decreased to 59.2%
in 2005 from 60.8% in 2004. The decrease in the loss ratio was
primarily due to a decline in the overall number of claims
reported in 2005 and the severity of those claims as compared to
2004. However, Association Casualtys loss ratio during
2005 was impacted by an increasing number of construction defect
claims on liability policies, which increased loss adjustment
expenses and produced a higher than targeted loss ratio. The
expense ratio increased to 42.3% in 2005 from 41.4% in 2004
primarily due to an increase in premium tax rates. Effective
September 1, 2005, Association Casualty no longer ceded any
portion of its business to Georgia Casualty. This business, now
retained by Association Casualty, had premium tax rates that
approximate up to 4% compared to its previous average rate of
2.8%. Also contributing to the increase in the expense ratio was
the decrease in net earned premiums coupled with a consistent
level of fixed expenses.
35
Georgia
Casualty
The following table summarizes, for the periods indicated,
Georgia Casualtys premiums, losses, expenses and
underwriting ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Gross written premiums(1)
|
|
$
|
20,715
|
|
|
$
|
48,388
|
|
|
$
|
65,345
|
|
Ceded premiums
|
|
|
(8,747
|
)
|
|
|
(19,943
|
)
|
|
|
(17,479
|
)
|
Ceded premiums(2)
|
|
|
(67
|
)
|
|
|
(745
|
)
|
|
|
(5,913
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net written premiums
|
|
$
|
11,901
|
|
|
$
|
27,700
|
|
|
$
|
41,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums
|
|
$
|
21,218
|
|
|
$
|
39,270
|
|
|
$
|
34,675
|
|
Net losses and loss adjustment
expenses
|
|
|
16,443
|
|
|
|
32,064
|
|
|
|
28,670
|
|
Underwriting expenses
|
|
|
14,074
|
|
|
|
16,607
|
|
|
|
15,839
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss
|
|
$
|
(9,299
|
)
|
|
$
|
(9,401
|
)
|
|
$
|
(9,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
77.5
|
%
|
|
|
81.6
|
%
|
|
|
82.7
|
%
|
Expense ratio
|
|
|
66.3
|
|
|
|
42.3
|
|
|
|
45.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
143.8
|
%
|
|
|
123.9
|
%
|
|
|
128.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes $16.2 million and $22.2 million in written
premiums assumed from Assocation Casualty in 2005 and 2004,
respectively. |
|
(2) |
|
Written premiums of $0.7 million in 2005 and
$5.9 million in 2004 ceded to Association Casualty under a
quota share reinsurance agreement and eliminated in
consolidation. This agreement was terminated effective
August 31, 2005. |
Gross written premiums at Georgia Casualty decreased
$27.7 million, or 57.2%, during 2006 as compared to 2005.
The decrease in gross written premiums was attributable to
several factors. As discussed previously, effective
September 1, 2005, Georgia Casualty no longer assumed new
business writings from Association Casualty and, as a result,
written premiums decreased $15.3 million. Also contributing
to the decrease in gross written premiums was the non-renewal of
targeted classes of property business as well as the
reassessment of coastal property exposures, both of which began
in 2005. Georgia Casualty has ceased writing policies with
significant heavy automobile exposures and has significantly
increased its required buffer zone away from wind prone coastal
exposures. These initiatives, coupled with an increased level of
price competition in the marketplace, resulted in a significant
decrease in gross written premiums during 2006.
Ceded premiums at Georgia Casualty decreased $11.9 million,
or 57.4%, during 2006 as compared to 2005. The decrease in ceded
premiums was primarily attributable to the significant decline
in gross written premiums. Also contributing to the decrease in
ceded premiums were significant 2005 adjustments to umbrella and
catastrophe ceded premiums that did not recur during the
comparable periods of 2006.
Gross written premiums at Georgia Casualty decreased
$17.0 million, or 25.9%, during 2005 as compared to 2004.
The decrease in premiums was primarily attributable to the
non-renewal of unprofitable accounts and reassessment of coastal
property exposures. During 2005, accounts resulting in
approximately $5.9 million in annualized gross written
premiums were non-renewed as a result of these initiatives.
Also, Georgia Casualty experienced an increased level of price
competition in the marketplace and ceased writing new property
business in the state of Florida, both of which resulted in a
decrease in 2005 business of approximately $4.0 million
from 2004. Effective August 31, 2005, Georgia Casualty and
Association Casualty terminated their quota share reinsurance
agreement. In addition, effective September 1, 2005,
Georgia Casualty no longer assumed business originated by
Georgia Casualty and written by Association Casualty. During
2005, Georgia Casualtys written premiums on behalf of
Association Casualty and subsequently reinsured by Georgia
Casualty were $16.2 million compared to $22.2 million
in 2004, a decrease of $6.0 million. Since
September 1, 2005, such business has remained with
Association Casualty.
36
Ceded premiums at Georgia Casualty decreased $2.7 million,
or 11.6%, during 2005 as compared to 2004. The decrease in ceded
premiums was primarily due to the non-recurring accrual of an
arbitration award of $3.1 million during 2004 which
resulted from a dispute with one of Georgia Casualtys
reinsurers. Also contributing to the comparative reduction was
the termination of the quota share reinsurance agreement,
discussed previously, and a negotiated rate adjustment to a
brokers commission, both of which resulted in a
$5.8 million reduction in 2005 ceded premiums.
Additionally, in 2005, Georgia Casualty accrued hurricane
related expenses of $0.9 million in catastrophic
reinsurance reinstatement premiums, compared to
$1.4 million in 2004, which consisted of $0.5 million
in catastrophic reinsurance reinstatement premiums and a
$0.9 million adjustment to the reinsurance provisional rate
accrual. Offsetting the decrease in ceded premiums were
increased rates as a result of more recent contract negotiations
that became effective on January 1, 2005. Ceded premiums
increased by approximately $3.2 million due to 2005 rate
increases. Prior to 2005, Georgia Casualtys primary
working layer reinsurance contract provided for variable pricing
based upon the companys actual loss experience; beginning
in 2005 all of the companys reinsurance contracts provided
for fixed rate pricing. Georgia Casualty accrued additional
reinsurance charges in 2005 related to prior years
reinsurance contracts with experience rated variable pricing
based on current year development of prior accident year claims.
The following table summarizes, for the periods indicated,
Georgia Casualtys earned premiums by line of business:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Workers compensation
|
|
$
|
8,363
|
|
|
$
|
12,909
|
|
|
$
|
11,608
|
|
Business automobile
|
|
|
4,322
|
|
|
|
11,026
|
|
|
|
9,470
|
|
General liability
|
|
|
2,001
|
|
|
|
434
|
|
|
|
351
|
|
Property
|
|
|
6,532
|
|
|
|
14,901
|
|
|
|
13,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premium
|
|
$
|
21,218
|
|
|
$
|
39,270
|
|
|
$
|
34,675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earned premiums decreased $18.1 million, or 46.0%,
during 2006 as compared to 2005 primarily as a result of the
initiatives discussed previously in combination with the
significant price competition on significantly all of Georgia
Casualtys products.
Net earned premiums increased $4.6 million, or 13.3%,
during 2005 as compared to 2004 primarily due to the
non-recurrence of the $3.1 million arbitration award
accrued as ceded premium in 2004. Also contributing to the
increase was a higher level of premium volume written during
2004 which was reflected as earned in 2005. Insurance premiums
are earned ratably over the policy term, and therefore premiums
earned in 2005 were related to premiums written during both 2004
and 2005.
The combined ratio for Georgia Casualty increased to 143.8% in
2006 from 123.9% in 2005. The loss ratio decreased to 77.5% in
2006 from 81.6% in 2005. The decrease in the loss ratio was due
to numerous large losses from fires, fatalities, and tornados
incurred by Georgia Casualty during 2005, which did not recur in
2006. Also in 2005, Georgia Casualty incurred $1.0 million
in net hurricane related losses, before consideration of state
windstorm assessments related thereto. The magnitude and
frequency of these losses had a significant impact on the loss
ratio during 2005, and did not recur in 2006. In addition,
Georgia Casualty has benefited from the extensive
re-underwriting of its book of business that began in the latter
part of 2005. The expense ratio increased to 66.3% in 2006 from
42.3% in 2005. The increase in the expense ratio was primarily
attributable to a $2.2 million charge related to an
assessment from the Mississippi Windstorm Underwriting
Association and a $1.0 million increase in the second
injury trust fund assessment accrual, both of which were
expensed in 2006. Also contributing to the increase in the
expense ratio was the significant decrease in net earned
premiums described above.
The combined ratio for Georgia Casualty decreased to 123.9% in
2005 from 128.4% in 2004. The loss ratio decreased to 81.6% in
2005 from 82.7% in 2004. The decrease in the loss ratio was
primarily due to a decrease in hurricane related losses. During
2005, Georgia Casualty incurred $1.0 million in net
hurricane
37
related losses compared to $1.4 million in 2004. However,
Georgia Casualtys loss ratio during 2005 was impacted by a
significant increase in both the frequency and severity of
claims particularly in the first quarter of 2005. In 2005,
Georgia Casualty incurred numerous large claims related to
losses from fires, fatalities, and tornados as discussed
previously above. The expense ratio decreased to 42.3% in 2005
from 45.7% in 2004. The decrease in the expense ratio was
primarily due to a consistent level of fixed expenses coupled
with an increase in net earned premiums.
Bankers
Fidelity
The following summarizes, for the periods indicated, Bankers
Fidelitys premiums, losses and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Medicare supplement
|
|
$
|
44,919
|
|
|
$
|
51,414
|
|
|
$
|
49,575
|
|
Other health products
|
|
|
3,041
|
|
|
|
2,890
|
|
|
|
2,933
|
|
Life insurance
|
|
|
10,960
|
|
|
|
11,600
|
|
|
|
12,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premium
|
|
|
58,920
|
|
|
|
65,904
|
|
|
|
65,442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses
|
|
|
42,020
|
|
|
|
46,375
|
|
|
|
45,827
|
|
Underwriting expenses
|
|
|
18,669
|
|
|
|
19,672
|
|
|
|
19,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
60,689
|
|
|
|
66,047
|
|
|
|
65,506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting loss
|
|
$
|
(1,769
|
)
|
|
$
|
(143
|
)
|
|
$
|
(64
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium revenue at Bankers Fidelity decreased $7.0 million,
or 10.6%, during 2006 as compared to 2005. The most significant
decrease in premiums was in the Medicare supplement line of
business, where premiums decreased $6.5 million, or 12.6%,
due to the continued decline in new business levels and
non-renewal of certain policies that resulted from increased
competition. Increased competition includes not only traditional
insurance company competitors but also the federal government as
it provides incentives directly and indirectly to seniors to
exit traditional Medicare programs and choose instead Medicare
Advantage and other similar plans which result in much different
economics to the insured. In 2006, the companys key states
in terms of premium revenue were Georgia, Pennsylvania, Ohio,
Utah and West Virginia, which collectively accounted for
approximately 56% of total earned premium for 2006. The Medicare
supplement line of business in these states increased
approximately $0.1 million as compared to 2005. Premiums
from the life insurance line of business decreased
$0.6 million, or 5.5%, during 2006 due to the continued
decline in sales related activities.
Premium revenue at Bankers Fidelity increased $0.5 million,
or .7%, during 2005 as compared to 2004. Premiums from the
Medicare supplement line of business increased
$1.8 million, or 3.7%, in 2005 over 2004 and accounted for
78% of total 2005 earned premium. In 2005, the companys
five key states in terms of premium revenue were consistent with
those in 2006 and accounted for approximately 57% of total
earned premium for 2005. The Medicare supplement line of
business in these states increased approximately
$0.5 million as compared to 2004. Significant rate
increases on existing Medicare supplement business implemented
in varying amounts by state and plan in 2004 resulted in
increased revenues in 2005. In addition, during 2004, Bankers
Fidelity purchased a block of Medicare supplement business with
an estimated annualized premium of $4.5 million, which
increased premium revenue during 2005. Partially offsetting the
2005 increase in Medicare supplement premium was a decline in
new business levels and existing policies that resulted from
increased competition. Premiums from the life insurance line of
business decreased $1.3 million, or 10.3%, during 2005 due
to a decline in sales related activities.
Benefits and losses decreased $4.4 million, or 9.4%, during
2006 as compared to 2005 and increased $0.5 million, or
1.2% during 2005 over 2004. As a percentage of earned premiums,
benefits and losses were 71.3% in 2006 compared to 70.4% in 2005
and 70.0% in 2004. The increase in the loss ratio in 2006 was
primarily due to the continued aging of the life business.
38
Underwriting expenses decreased $1.0 million, or 5.1%,
during 2006 as compared to 2005, and decreased slightly during
2005 from 2004. The decrease in underwriting expenses during
2006 was directly related to the decline in premium revenues. As
a percentage of earned premiums, these expenses were 31.7% in
2006 compared to 29.8% in 2005 and 30.1% in 2004. The increase
in the expense ratio during 2006 was primarily due to a
consistent level of fixed underwriting and other expenses in
conjunction with a decrease in premium revenues.
Investment
Income And Realized Gains
Investment income of $18.3 million increased
$1.6 million, or 9.8%, during 2006 as compared to 2005 and
increased $0.8 million, or 5.2%, during 2005 as compared to
2004. The increase in investment income during 2006 and 2005 was
primarily due to a higher level of average invested assets as
well as a higher average yield on these investments.
The Company had net realized investment gains of
$6.7 million in 2006 compared to net realized investment
losses of $10.5 million in 2005 and net realized investment
gains of $2.2 million in 2004. The increase in net realized
gains in 2006 was primarily due to the sale of a portion of the
Companys automotive sector investments (bonds of GM and
Ford), a portion of the Companys investment in equity
securities of Wachovia Corporation, and the sale of a real
estate partnership interest, all of which resulted in realized
investment gains totaling $6.7 million. During the years
ended December 31, 2005 and 2004, the Company recorded
investment impairments due to other than temporary declines in
values, which reduced reported realized investment gains,
related to the following investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Corporate bonds
|
|
$
|
|
|
|
$
|
9,492
|
|
|
$
|
|
|
Redeemable preferred stocks
|
|
$
|
|
|
|
$
|
1,274
|
|
|
$
|
281
|
|
Common stocks
|
|
$
|
|
|
|
$
|
|
|
|
$
|
179
|
|
While the impairments did not impact the carrying value of the
investments, they resulted in realized losses of
$10.8 million in 2005 and $0.5 million in 2004. The
impairment losses for 2005 were due primarily to the write down
of the value of GM, GMAC, and Ford fixed maturity investments,
all of which resulted in a charge of $10.7 million.
Management continually evaluates the Companys investment
portfolio and, as needed, makes adjustments for impairments
and/or will
divest investments. (See Note 2 of Notes to Consolidated
Financial Statements.)
Interest
Expense
Interest expense of $4.6 million increased
$1.0 million, or 27.5%, during 2006 as compared to 2005.
The increase in interest expense during 2006 was due primarily
to an increase in interest rates. During 2006, the
Companys outstanding debt had a variable interest rate
tied to three-month London Interbank Offered Rate
(LIBOR), which increased throughout 2006. Also, on
February 28, 2006, the Company entered into a
$3.0 million term loan credit agreement with Wachovia Bank,
N.A. (Wachovia), which resulted in a higher average
debt level and increased interest expense during 2006 as
compared to the prior year. In the fourth quarter of 2006, the
Company entered into a new credit agreement containing a
revolving credit facility (the Revolver). Borrowings
under the Revolver were used to repay the amounts outstanding
under the Companys prior term loans with Wachovia (as
described below in Liquidity and Capital Resources).
Interest expense of $3.6 million increased
$0.5 million, or 17.6%, during 2005 as compared to 2004.
The increase in interest expense during 2005 was due to an
increase in interest rates. During 2005, the Companys
outstanding debt had a variable interest rate tied to
three-month LIBOR, which increased throughout 2005. In the third
quarter of 2004 and during 2005, the Company repaid
$4.8 million in principal on a then-existing term loan to
Wachovia, which helped to offset the increase in interest
expense by reducing the average debt level.
39
Other
Expenses
Other expenses (commissions, underwriting expenses, and other
expenses) decreased $1.6 million, or 2.1%, in 2006 as
compared to 2005. The decrease in other expenses during 2006 was
primarily attributable to a reduction in commission expenses
that resulted directly from a decline in premium revenue. The
decrease in premium revenue that occurred in 2006 was primarily
due to the non-renewal of targeted classes of property business,
the reassessment of coastal property exposures, lower sales
activity, and an increased level of price competition. Partially
offsetting the decrease in other expenses during 2006 was a
$2.2 million charge related to a Mississippi windstorm
assessment which was not covered by reinsurance and a
$1.0 million second injury trust fund accrual adjustment,
both of which occurred in the Companys property and
casualty operations. On a consolidated basis, as a percentage of
earned premiums, other expenses increased to 46.7% in 2006 from
41.3% in 2005. The increase in the expense ratio during 2006 was
primarily due to a consistent level of fixed expenses coupled
with a decrease in premium revenues. In the fourth quarter of
2006, the Company completed a reassessment of all positions in
the property and casualty operations. As a result of such
analysis, there was a right sizing of the workforce and
$0.1 million of severance expense was incurred.
Other expenses (commissions, underwriting expenses, and other
expenses) increased $3.6 million, or 5.2%, in 2005 as
compared to 2004. The increase in other expenses during 2005 was
primarily attributable to increased acquisition costs at
American Southern. Agents variable commissions at American
Southern increased $0.8 million during 2005 due primarily
to lower loss ratios. The majority of American Southerns
business is structured in a way that agents are rewarded or
penalized based upon the loss ratio of the business they submit
to the company. In periods where the loss ratio decreases,
commissions and underwriting expenses will increase and
conversely in periods where the loss ratio increases,
commissions and underwriting expenses should decrease. Fixed
commissions at American Southern also increased
$0.4 million during 2005 primarily as a result of the
increased surety bond business, which has a higher commission
rate than other lines of business. In addition, the deferral of
acquisition costs at American Southern in 2005 decreased
$0.9 million from 2004 and, as a result, increased other
expenses during 2005. The decrease in deferred acquisition costs
at American Southern was primarily due to a significantly lower
level of premium growth in 2005 than that which occurred in
2004. The Company also experienced a significant increase in
expenses related to Sarbanes-Oxley compliance work and audit fee
accruals. These expenses increased $1.3 million, or 207.9%,
in 2005 as compared to 2004. On a consolidated basis, as a
percentage of earned premiums, other expenses increased to 41.3%
in 2005 from 40.8% in 2004.
Liquidity
And Capital Resources
The primary cash needs of the Company are for the payment of
claims and operating expenses, maintaining adequate statutory
capital and surplus levels, and meeting debt service
requirements. Current and expected patterns of claim frequency
and severity may change from period to period but generally are
expected to continue within historical ranges. The
Companys primary sources of cash are written premiums,
investment income and the sale and maturity of invested assets.
The Company believes that, within each subsidiary, total
invested assets will be sufficient to satisfy all policy
liabilities and that cash inflows from investment earnings,
future premium receipts and reinsurance collections will be
adequate to fund the payment of claims and expenses as needed.
Cash flows at the Parent are derived from dividends, management
fees, and tax sharing payments from the subsidiaries. The cash
needs of the Parent are for the payment of operating expenses,
the acquisition of capital assets and debt service requirements.
Dividend payments to the Parent by its insurance subsidiaries
are subject to annual limitations and are restricted to the
greater of 10% of statutory surplus or statutory earnings before
recognizing realized investment gains of the individual
insurance subsidiaries. At December 31, 2006, the
Parents insurance subsidiaries had statutory surplus of
$114.4 million.
The Parent provides certain administrative, purchasing and other
services to each of its subsidiaries. The amounts charged to and
paid by the subsidiaries were $14.8 million,
$9.8 million, and $9.0 million in 2006, 2005, and
2004, respectively. In addition, the Parent has a formal
tax-sharing agreement with each of its insurance subsidiaries. A
net total of $2.1 million, $3.1 million and
$4.5 million was paid to the Parent under
40
the tax sharing agreements in 2006, 2005, and 2004,
respectively. Dividends were paid to Atlantic American by its
subsidiaries totaling $9.2 million in 2006,
$13.2 million in 2005, and $5.8 million in 2004. As a
result of the Parents tax loss carryforwards, which
totaled approximately $11.9 million at December 31,
2006, it is anticipated that the tax sharing agreements will
continue to provide the Parent with additional funds with which
to meet its cash flow obligations.
At December 31, 2006, the Companys $54.0 million
of borrowings consisted of $12.8 million of bank debt with
Wachovia and an aggregate of $41.2 million of outstanding
junior subordinated deferrable interest debentures (Junior
Subordinated Debentures). On December 22, 2006, the
Company entered into a credit agreement (the Credit
Agreement) with Wachovia providing for a reducing
revolving credit facility pursuant to which the Company may,
subject to the terms and conditions thereof, initially borrow or
reborrow up to $15.0 million (the Commitment
Amount). The Commitment Amount is incrementally reduced
every six months beginning on July 1, 2007. Borrowings
under the Credit Agreement were used to repay amounts
outstanding under the Companys prior term loans with
Wachovia, which were terminated upon the closing of the Credit
Agreement, and are to be used for general corporate purposes.
The interest rate on amounts outstanding under the Credit
Agreement is, at the option of the Company, equivalent to either
(a) the base rate (which equals the higher of the Prime
Rate or 0.5% above the Federal Funds Rate, each as defined) or
(b) the LIBOR determined on an interest period of
1-month,
2-months,
3-months or
6-months,
plus an Applicable Margin (as defined), and was 7.37% at
December 31, 2006. The Applicable Margin varies based upon
the Companys leverage ratio (funded debt to total
capitalization, each as defined) and ranges from 1.75% to 2.50%.
Interest on amounts outstanding is payable quarterly. If not
sooner repaid in full, the Credit Agreement requires the Company
to repay $0.5 million in principal on each of June 30
and December 31, 2007 and 2008, $1.0 million and
$1.5 million in principal on June 30 and
December 31, 2009, respectively, with one final payment of
$10.5 million in principal at maturity on June 30,
2010. The Credit Agreement requires the Company to comply with
certain covenants, including, among others, ratios that relate
funded debt to both total capitalization and earnings before
interest, taxes, depreciation and amortization, as well as the
maintenance of minimum levels of tangible net worth. The Company
must also comply with limitations on capital expenditures,
certain payments, additional debt obligations, equity
repurchases and redemptions, as well as minimum risk-based
capital levels. Upon the occurrence of an event of default,
Wachovia may terminate the Credit Agreement and declare all
amounts outstanding under the Credit Agreement due and payable
in full.
The Company has two statutory trusts which exist for the
exclusive purpose of issuing trust preferred securities
representing undivided beneficial interests in the assets of the
trusts and investing the gross proceeds of the trust preferred
securities in Junior Subordinated Debentures. The outstanding
$41.2 million of Junior Subordinated Debentures have a
maturity of thirty years from their original date of issuance,
are callable, in whole or in part, only at the option of the
Company five years after their respective dates of issue and
quarterly thereafter, and have an interest rate of three-month
LIBOR plus an applicable margin. The margin ranges from 4.00% to
4.10%. At December 31, 2006, the effective interest rate
was 9.43%. The obligations of the Company with respect to the
issuances of the trust preferred securities represent a full and
unconditional guarantee by the Parent of each trusts
obligations with respect to the trust preferred securities.
Subject to certain exceptions and limitations, the Company may
elect from time to time to defer Junior Subordinated Debenture
interest payments, which would result in a deferral of
distribution payments on the related trust preferred securities.
The Company intends to pay its obligations under the Credit
Agreement and the Junior Subordinated Debentures using dividend
and tax sharing payments from the operating subsidiaries, or
from potential future financing arrangements. In addition, the
Company believes that, if necessary, at maturity, the Credit
Agreement can be refinanced with the current lender, although
there can be no assurance of the terms or conditions of such a
refinancing, or its availability.
At December 31, 2006, the Company had two series of
preferred stock outstanding, substantially all of which is held
by affiliates of the Companys chairman and principal
shareholders. The outstanding shares of Series B Preferred
Stock (Series B Preferred Stock) have a stated
value of $100 per share; accrue annual dividends at a rate
of $9.00 per share and are cumulative; in certain
circumstances may be convertible into an
41
aggregate of approximately 3,358,000 shares of common
stock; and are redeemable solely at the Companys option.
The Series B Preferred Stock is not currently convertible.
At December 31, 2006, the Company had accrued, but unpaid,
dividends on the Series B Preferred Stock totaling
$13.3 million. On September 30, 2006, the Company
issued and sold 70,000 shares of its Series D
Preferred Stock, par value $1.00 per share
(Series D Preferred Stock) to Gulf Capital
Services, Ltd., an affiliate of the Companys Chairman, for
an aggregate purchase price of $7.0 million. The
outstanding shares of Series D Preferred Stock have a
stated value of $100 per share; accrue annual dividends at
a rate of $7.25 per share (payable in cash or shares of the
Companys common stock at the option of the board of
directors of the Company) and are cumulative. In certain
circumstances the shares of Series D Preferred Stock may be
convertible into an aggregate of approximately
1,754,000 shares of the Companys common stock,
subject to certain adjustments and provided that such
adjustments do not result in the Company issuing more than
approximately 2,703,000 shares of common stock without
obtaining prior shareholder approval; and are redeemable solely
at the Companys option. The Series D Preferred Stock
is not currently convertible. As of December 31, 2006, the
Company had accrued but unpaid dividends on the Series D
Preferred Stock of $0.1 million.
Net cash provided by operating activities totaled
$0.5 million in 2006, $11.3 million in 2005, and
$6.0 million in 2004. The decrease in operating cash flows
during 2006 was primarily attributable to the significant
decrease in premiums coupled with an increase in loss related
payments to settle prior years outstanding claims. The
increase in operating cash flows in 2005 as compared to 2004 was
attributable to more aggressive collection efforts related to
reinsurance and other receivables. Cash and short-term
investments decreased to $27.3 million at December 31,
2006 from $41.8 million at December 31, 2005. The
decrease in cash and short-term investments during 2006 was
primarily due to an increased level of investing exceeding
normal sales and maturities. Partially offsetting the 2006
decrease in cash and short-term investments was the issuance of
Series D Preferred Stock for an aggregate purchase price of
$7.0 million and $3.0 million in bank financing. Cash
and short-term investments at December 31, 2006 of
$27.3 million are believed to be sufficient to meet the
Companys near-term needs.
The Company believes that the cash flows it receives from its
subsidiaries and, if needed, additional borrowings from banks
and affiliates of the Company will enable the Company to meet
its liquidity requirements for the foreseeable future.
Management is not aware of any current recommendations by
regulatory authorities which, if implemented, would have a
material adverse effect on the Companys liquidity, capital
resources or operations.
New
Accounting Pronouncements
In February 2007, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 159, The Fair Value
Option for Financial Assets and Financial Liabilities, Including
an Amendment of FASB Statement No. 115. This
statement permits entities to choose, at specified election
dates, to measure eligible items at fair value (i.e., the fair
value option). Items eligible for the fair value option include
certain recognized financial assets and liabilities, rights and
obligations under certain insurance contracts that are not
financial instruments, host financial instruments resulting from
the separation of an embedded nonfinancial derivative instrument
from a nonfinancial hybrid instrument, and certain commitments.
Business entities are required to report unrealized gains and
losses on items for which the fair value option has been elected
in net income. The fair value option: (a) may be applied
instrument by instrument, with certain exceptions; (b) is
irrevocable (unless a new election date occurs); and (c) is
applied only to entire instruments and not to portions of
instruments. SFAS No. 159 is effective as of the beginning
of an entitys first fiscal year that begins after
November 15, 2007, although early adoption is permitted
under certain conditions. The Company does not currently expect
to apply the fair value option to any eligible items.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of
SFAS No. 87, 88, 106, and 132(R).
SFAS No. 158 requires the full recognition of the
overfunded or underfunded status of a defined benefit pension
plan as an asset or liability along with a corresponding
after-tax adjustment to accumulated other comprehensive income
(loss) included in shareholders equity. Under previous
accounting standards, information about the then-current funded
status of such plan was reported in the notes to the financial
statements. The recognition and
42
the disclosure requirements of SFAS No. 158 are
effective for fiscal years ending after December 15, 2006.
Adoption of this statement did not have a material impact on the
Companys financial position or results of operations.
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB No. 108). SAB No. 108
provides guidance for how errors should be evaluated to assess
materiality from a quantitative perspective.
SAB No. 108 permits companies to initially apply its
provisions by either restating prior financial statements or
recording the cumulative effect of initially applying the
approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting
adjustment to retained earnings. The guidance provided by
SAB No. 108 was considered and did not have an effect
on the Companys financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair
value under accounting principles generally accepted in the
United States, and enhances disclosures about fair value
measurements. SFAS No. 157 provides guidance on
measuring fair value when required under existing accounting
standards and establishes a hierarchy that prioritizes the
inputs to valuation techniques. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. Adoption of this statement is not expected to have a
material impact on the Companys financial position or
results of operations.
In July 2006, the FASB issued Financial Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes, and prescribes a
recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken, or expected to be
taken, in a tax return. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006, with early adoption permitted.
Adoption of this Interpretation is not expected to have a
material impact on the Companys financial position or
results of operations.
In September 2005, the AICPA issued Statement of Position
05-1,
Accounting by Insurance Enterprises for Deferred
Acquisition Costs (DAC) in Connection with
Modifications or Exchanges of Insurance Contracts,
(SOP 05-1).
SOP 05-1
provides guidance on accounting by insurance enterprises for DAC
on internal replacements of insurance. An internal replacement
is a modification in product benefits, features, rights or
coverages that occurs by the exchange of a contract for a new
contract, or by amendment, endorsement, or rider to a contract,
or by the election of a feature or coverage within a contract.
Modifications that result in a replacement contract that is
substantially changed from the replaced contract should be
accounted for as an extinguishment of the replaced contract.
Unamortized DAC, unearned revenue liabilities and deferred sales
inducements from the replaced contract must be written-off.
Modifications that result in a contract that is substantially
unchanged from the replaced contract should be accounted for as
a continuation of the replaced contract.
SOP 05-1
is effective for internal replacements occurring in fiscal years
beginning after December 15, 2006, with earlier adoption
encouraged. The Company will adopt
SOP 05-1
on January 1, 2007 and does not expect the effect of the
adoption to be material.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of
Accounting Principles Board (APB) Opinion
No. 20 and SFAS No. 3.
SFAS No. 154 applies to all voluntary changes in
accounting principles and changes the requirements of accounting
for and reporting a change in accounting principle and is
effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005.
SFAS No. 154 requires retrospective application to
prior periods financial statements of a voluntary change
in accounting principle unless such application is impractical.
APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in
net income, in the period of the change, the cumulative effect
of change to the new accounting principle. Adoption of this
statement did not have a material impact on the Companys
financial position or results of operations.
43
In December 2004, the FASB issued SFAS No. 123R, which
replaces SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS No. 123R requires all companies to
recognize compensation costs for share-based payments to
employees based on the grant-date fair value of the award for
financial statements. The pro forma disclosures previously
permitted under SFAS No. 123 are no longer an
alternative to financial statement recognition. The transition
method included a prospective or retrospective adoption option.
The Company adopted SFAS No. 123R during the first
quarter of 2006 using the prospective method. Adoption of this
statement did not have a material impact on the Companys
financial position or results of operations.
Impact of
Inflation
Insurance premiums are established before the amount of losses
and loss adjustment expenses, or the extent to which inflation
may affect such losses and expenses, are known. Consequently,
the Company attempts, in establishing its premiums, to
anticipate the potential impact of inflation. If, for
competitive reasons, premiums cannot be increased to anticipate
inflation, this cost would be absorbed by the Company. Inflation
also affects the rate of investment return on the Companys
investment portfolio with a corresponding effect on investment
income.
Off-Balance
Sheet Arrangements
In the normal course of business, the Company has structured
borrowings that, in accordance with U.S. GAAP, are recorded
on the Companys balance sheet at an amount that differs
from the ultimate contractual obligation. See Note 6 of
Notes to Consolidated Financial Statements.
Contractual
Obligations
The following table discloses the amounts of payments due under
specified contractual obligations, aggregated by category of
contractual obligation, for specified time periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Bank debt payable
|
|
$
|
12,750
|
|
|
$
|
1,000
|
|
|
$
|
3,500
|
|
|
$
|
8,250
|
|
|
$
|
|
|
Junior Subordinated Debentures
|
|
|
41,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,238
|
|
Interest payable(1)
|
|
|
101,482
|
|
|
|
4,681
|
|
|
|
8,353
|
|
|
|
8,510
|
|
|
|
79,938
|
|
Operating leases
|
|
|
4,557
|
|
|
|
1,095
|
|
|
|
2,172
|
|
|
|
1,183
|
|
|
|
107
|
|
Purchase commitments(2)
|
|
|
11,900
|
|
|
|
11,849
|
|
|
|
51
|
|
|
|
|
|
|
|
|
|
Losses and claims(3)
|
|
|
162,950
|
|
|
|
61,302
|
|
|
|
48,527
|
|
|
|
18,375
|
|
|
|
34,746
|
|
Future policy benefits(4)
|
|
|
52,019
|
|
|
|
8,785
|
|
|
|
17,918
|
|
|
|
17,795
|
|
|
|
7,521
|
|
Unearned premiums(5)
|
|
|
26,535
|
|
|
|
11,940
|
|
|
|
7,742
|
|
|
|
3,631
|
|
|
|
3,222
|
|
Other policy liabilities
|
|
|
1,816
|
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
415,247
|
|
|
$
|
102,468
|
|
|
$
|
88,263
|
|
|
$
|
57,744
|
|
|
$
|
166,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest payable is based on interest rates as of
December 31, 2006 and assumes that all debt remains
outstanding until its stated contractual maturity. The interest
rates on outstanding bank debt and trust preferred obligations
are variable and are equal to three-month LIBOR plus an
applicable predetermined margin. |
|
(2) |
|
Represents balances due for goods
and/or
services which have been contractually committed as of
December 31, 2006. To the extent contracts provide for
early termination with notice but without penalty, only the
amounts contractually due during the notice period have been
included. |
|
(3) |
|
Losses and claims include case reserves for reported claims and
reserves for claims incurred but not reported
(IBNR). While payments due on claim reserves are
considered contractual obligations because they relate to
insurance policies issued by the Company, the ultimate amount to
be paid to settle both case reserves and IBNR reserves is an
estimate, subject to significant uncertainty. The actual amount
to be paid |
44
|
|
|
|
|
is not determined until the Company reaches a settlement with
any applicable claimant. Final claim settlements may vary
significantly from the present estimates, particularly since
many claims will not be settled until well into the future. In
estimating the timing of future payments by year, the Company
has assumed that its historical payment patterns will continue.
However, the actual timing of future payments will likely vary
materially from these estimates due to, among other things,
changes in claim reporting and payment patterns and large
unanticipated settlements. Amounts reflected do not include
reinsurance amounts which may also be recoverable based on the
level of ultimate sustained loss. |
|
(4) |
|
Future policy benefits relate to life insurance policies on
which the Company is not currently making payments and will not
make future payments unless and until the occurrence of an
insurable event, such as a death or disability, or the
occurrence of a payment triggering event, such as a surrender of
a policy. Occurrence of any of these events is outside the
control of the Company and the payment estimates are based on
significant uncertainties such as mortality, morbidity,
expenses, persistency, investment returns, inflation and the
timing of payments. For regulatory purposes, the Company does
perform cash flow modeling of such liabilities, which is the
basis for the indicated disclosure; however, due to the
significance of the assumptions used, the amount presented could
materially differ from actual results. |
|
(5) |
|
Unearned premiums represent potential future revenue for the
Company; however, under certain circumstances, such premiums may
be refundable with cancellation of the underlying policy.
Significantly all unearned premiums will be earned within the
following twelve month period as the related future insurance
protection is provided. Significantly all costs related to such
unearned premiums have already been incurred and paid and are
included in deferred acquisition costs; however, future losses
related to the unearned premiums have not been recorded. The
contractual obligations related to unearned premiums reflected
in the table represent the average loss ratio applied to the
year end unearned premium balances, with loss payments projected
in comparable proportions to the year end loss and claims
reserves. Projecting future losses is subject to significant
uncertainties and the projected payments will most likely vary
materially from these estimates as a result of differences in
future severity, frequency and other anticipated and
unanticipated factors. Amounts reflected do not take into
account reinsurance amounts which may be recoverable based on
the level of ultimate sustained loss. |
Forward-Looking
Statements
Certain of the statements contained herein are forward-looking
statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and include estimates and
assumptions related to, among other things, economic,
competitive and legislative developments. The forward-looking
statements are subject to changes and uncertainties which are,
in many instances, beyond the Companys control and have
been made based upon managements current expectations and
beliefs concerning future developments and their potential
effect upon the Company. There can be no assurance that future
developments will be in accordance with managements
expectations or that the effect of future developments on the
Company will be those anticipated by management. Actual results
could differ materially from those expected by the Company,
depending on the outcome of various factors. These factors
include, among others, those discussed in the Risk
Factors section and: unanticipated increases in the rate,
number and amounts of claims outstanding; the possible
occurrence of terrorist attacks; the level of performance of
reinsurance companies under reinsurance contracts and the
availability, pricing and adequacy of reinsurance to protect the
Company against losses; changes in the stock markets, interest
rates or other financial markets, including the potential effect
on the Companys statutory capital levels; the uncertain
effect on the Company of regulatory and market-driven changes in
practices relating to the payment of incentive compensation to
brokers, agents and other producers; the incidence and severity
of catastrophes, both natural and man-made; stronger than
anticipated competitive activity; unfavorable judicial or
legislative developments, including the possibility that the
Terrorism Risk Insurance Act of 2002 is not ultimately extended;
the potential effect of regulatory developments, including those
which could increase the Companys business costs and
required capital levels; the possibility of general economic and
business conditions that are less favorable than anticipated;
the Companys ability to distribute its products through
distribution channels, both current and future; the uncertain
effect of emerging claim and coverage issues; and the effect of
assessments and other surcharges for guaranty funds and
second-injury trust funds and other mandatory pooling
arrangements. Many of such factors are beyond the Companys
ability to control or predict. As a result, the
45
Companys actual financial condition, results of operations
and stock price could differ materially from those expressed in
any forward-looking statements made by the Company. Undue
reliance should not be placed upon forward-looking statements
contained herein. The Company does not intend to publicly update
any forward-looking statements that may be made from time to
time by, or on behalf of, the Company.
|
|
ITEM 7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
Interest
Rate and Market Risk
Due to the nature of the Companys business, it is exposed
to both interest rate and market risk. Changes in interest
rates, which represent a significant risk factor affecting the
Company, may result in changes in the fair value of the
Companys investments, cash flows and interest income and
expense. To manage this risk, the Company generally invests in
U.S. Government agency fixed maturity securities and
monitors its level of investment in securities that are directly
linked to loans or mortgages.
The Company is also subject to risk from changes in equity
prices. For instance, Atlantic American owned $19.9 million
of common stock of Wachovia Corporation at December 31,
2006. A 10% decrease in the share price of the common stock of
Wachovia Corporation would result in a decrease of approximately
$1.3 million to shareholders equity.
The table below summarizes the estimated fair values that might
result from changes in interest rates applicable to the
Companys fixed maturity portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+200bp
|
|
|
+100bp
|
|
|
Fair value
|
|
|
−100bp
|
|
|
−200bp
|
|
|
|
(In thousands)
|
|
|
December 31, 2006
|
|
$
|
232,709
|
|
|
$
|
246,666
|
|
|
$
|
262,316
|
|
|
$
|
279,888
|
|
|
$
|
299,721
|
|
December 31, 2005
|
|
$
|
206,316
|
|
|
$
|
219,123
|
|
|
$
|
233,570
|
|
|
$
|
249,937
|
|
|
$
|
268,567
|
|
The Company is also subject to risk from changes in equity
prices. The table below summarizes the effect that a change in
share price would have on the value of the Companys equity
portfolio, including the Companys single largest equity
holding.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
+20%
|
|
|
+10%
|
|
|
Fair Value
|
|
|
−10%
|
|
|
−20%
|
|
|
|
(In thousands)
|
|
|
December 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Wachovia Corporation
|
|
$
|
23,892
|
|
|
$
|
21,901
|
|
|
$
|
19,910
|
|
|
$
|
17,919
|
|
|
$
|
15,928
|
|
Other equity holdings
|
|
|
10,699
|
|
|
|
9,808
|
|
|
|
8,916
|
|
|
|
8,024
|
|
|
|
7,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity holdings
|
|
$
|
34,591
|
|
|
$
|
31,709
|
|
|
$
|
28,826
|
|
|
$
|
25,943
|
|
|
$
|
23,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Wachovia Corporation
|
|
$
|
27,441
|
|
|
$
|
25,154
|
|
|
$
|
22,867
|
|
|
$
|
20,580
|
|
|
$
|
18,293
|
|
Other equity holdings
|
|
|
13,893
|
|
|
|
12,736
|
|
|
|
11,578
|
|
|
|
10,421
|
|
|
|
9,263
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity holdings
|
|
$
|
41,334
|
|
|
$
|
37,890
|
|
|
$
|
34,445
|
|
|
$
|
31,001
|
|
|
$
|
27,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The interest rate on the Companys debt is variable and
based on LIBOR. The table below summarizes the effect that
changes in interest rates would have on the Companys
interest expense.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest Expense
|
|
|
|
|
|
Interest Expense
|
|
|
|
+200bp
|
|
|
+100bp
|
|
|
Debt
|
|
|
−100bp
|
|
|
−200bp
|
|
|
|
(In thousands)
|
|
|
December 31, 2006
|
|
$
|
1,055
|
|
|
$
|
528
|
|
|
$
|
53,988
|
|
|
$
|
(528
|
)
|
|
$
|
(1,055
|
)
|
December 31, 2005
|
|
$
|
1,005
|
|
|
$
|
503
|
|
|
$
|
51,488
|
|
|
$
|
(503
|
)
|
|
$
|
(1,005
|
)
|
On February 21, 2006, the Company entered into a zero cost
rate collar with Wachovia to hedge future interest payments on a
portion of the Junior Subordinated Debentures. The notional
amount of the collar was $18,042 with an effective date of
March 6, 2006. The collar has a LIBOR floor rate of 4.77%
and a LIBOR cap rate of 5.85% and adjusts quarterly on the
4th of each March, June, September and December through
termination on March 4, 2013.
46
|
|
ITEM 8.
|
Financial
Statements And Supplementary Data
|
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
Page
|
|
ATLANTIC AMERICAN
CORPORATION
|
|
|
|
|
|
|
|
48
|
|
|
|
|
49
|
|
|
|
|
50
|
|
|
|
|
51
|
|
|
|
|
52
|
|
|
|
|
53
|
|
47
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Atlantic American Corporation
Atlanta, Georgia
We have audited the accompanying consolidated balance sheets of
Atlantic American Corporation and subsidiaries (the
Company) as of December 31, 2006 and 2005, and
the related consolidated statements of operations,
stockholders equity, and cash flows for each of the three
years in the period ended December 31, 2006. We have also
audited schedules II, III, IV and VI as of and for
each of the three years in the period ended December 31,
2006. These consolidated financial statements and financial
statement schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on the
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Companys internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Atlantic American Corporation and subsidiaries at
December 31, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2006, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, the related financial statement
schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
BDO SEIDMAN LLP
Atlanta, Georgia
March 28, 2007
48
ATLANTIC
AMERICAN CORPORATION
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
|
(Dollars in thousands, except per share data)
|
|
|
ASSETS
|
Cash and cash equivalents,
including short-term investments of $20,188 and $27,726 in 2006
and 2005, respectively
|
|
$
|
27,294
|
|
|
$
|
41,776
|
|
Investments
|
|
|
298,775
|
|
|
|
276,968
|
|
Receivables:
|
|
|
|
|
|
|
|
|
Reinsurance
|
|
|
54,493
|
|
|
|
57,406
|
|
Other, net of allowance for
doubtful accounts of $1,718 and $1,501 in 2006 and 2005,
respectively
|
|
|
34,976
|
|
|
|
37,643
|
|
Deferred income taxes, net
|
|
|
5,755
|
|
|
|
7,099
|
|
Deferred acquisition costs
|
|
|
24,418
|
|
|
|
27,835
|
|
Other assets
|
|
|
9,913
|
|
|
|
8,682
|
|
Goodwill
|
|
|
3,008
|
|
|
|
3,008
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
458,632
|
|
|
$
|
460,417
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS EQUITY
|
Insurance reserves and
policyholder funds
|
|
$
|
267,507
|
|
|
$
|
283,297
|
|
Accounts payable and accrued
expenses
|
|
|
42,949
|
|
|
|
38,179
|
|
Payable for securities
|
|
|
|
|
|
|
7,000
|
|
Debt payable
|
|
|
53,988
|
|
|
|
51,488
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
364,444
|
|
|
|
379,964
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
(Note 8)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred stock, $1 par,
4,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
Series B preferred,
134,000 shares issued and outstanding; $13,400 redemption
value
|
|
|
134
|
|
|
|
134
|
|
Series D preferred,
70,000 shares issued and outstanding in 2006; $7,000
redemption value
|
|
|
70
|
|
|
|
|
|
Common stock, $1 par,
50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
21,484,440 shares issued in
2006 and 21,412,138 shares issued in 2005 and
21,481,413 shares outstanding in 2006 and
21,383,255 shares outstanding in 2005
|
|
|
21,484
|
|
|
|
21,412
|
|
Additional paid-in capital
|
|
|
55,832
|
|
|
|
48,925
|
|
Retained earnings (accumulated
deficit)
|
|
|
4,969
|
|
|
|
(2,780
|
)
|
Accumulated other comprehensive
income
|
|
|
11,707
|
|
|
|
12,846
|
|
Treasury stock, at cost,
3,027 shares in 2006 and 28,883 shares in 2005
|
|
|
(8
|
)
|
|
|
(84
|
)
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
94,188
|
|
|
|
80,453
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and
shareholders equity
|
|
$
|
458,632
|
|
|
$
|
460,417
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
49
ATLANTIC
AMERICAN CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except
|
|
|
|
per share data)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance premiums
|
|
$
|
153,705
|
|
|
$
|
177,593
|
|
|
$
|
170,860
|
|
Investment income
|
|
|
18,323
|
|
|
|
16,685
|
|
|
|
15,860
|
|
Other income
|
|
|
813
|
|
|
|
1,263
|
|
|
|
1,183
|
|
Realized investment gains
(losses), net
|
|
|
6,691
|
|
|
|
(10,456
|
)
|
|
|
2,199
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
|
179,532
|
|
|
|
185,085
|
|
|
|
190,102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance benefits and losses
incurred
|
|
|
91,932
|
|
|
|
115,676
|
|
|
|
113,077
|
|
Commissions and underwriting
expenses
|
|
|
56,106
|
|
|
|
58,376
|
|
|
|
56,089
|
|
Interest expense
|
|
|
4,605
|
|
|
|
3,611
|
|
|
|
3,071
|
|
Other
|
|
|
15,600
|
|
|
|
14,887
|
|
|
|
13,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
168,243
|
|
|
|
192,550
|
|
|
|
185,781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
11,289
|
|
|
|
(7,465
|
)
|
|
|
4,321
|
|
Income tax expense (benefit)
|
|
|
2,353
|
|
|
|
(4,290
|
)
|
|
|
(696
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
8,936
|
|
|
|
(3,175
|
)
|
|
|
5,017
|
|
Preferred stock dividends
|
|
|
(1,333
|
)
|
|
|
(1,206
|
)
|
|
|
(1,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) applicable to
common stock
|
|
$
|
7,603
|
|
|
$
|
(4,381
|
)
|
|
$
|
3,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common
share:
|
|
$
|
.36
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common
share:
|
|
$
|
.33
|
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
50
ATLANTIC
AMERICAN CORPORATION
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Earnings
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid-In
|
|
|
(Accumulated
|
|
|
Comprehensive
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Deficit)
|
|
|
Income
|
|
|
Stock
|
|
|
Total
|
|
|
|
(Dollars in thousands)
|
|
|
Balance, December 31, 2003
|
|
$
|
139
|
|
|
$
|
21,412
|
|
|
$
|
51,956
|
|
|
$
|
(4,457
|
)
|
|
$
|
18,293
|
|
|
$
|
(450
|
)
|
|
$
|
86,893
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,017
|
|
|
|
|
|
|
|
|
|
|
|
5,017
|
|
Decrease in unrealized investment
gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,985
|
)
|
|
|
|
|
|
|
(1,985
|
)
|
Fair value adjustment to derivative
financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
445
|
|
|
|
|
|
|
|
445
|
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(131
|
)
|
|
|
|
|
|
|
(131
|
)
|
Deferred income tax attributable to
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
585
|
|
|
|
|
|
|
|
585
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,931
|
|
Preferred stock redeemed
|
|
|
(5
|
)
|
|
|
|
|
|
|
(495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
Dividends accrued on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,216
|
)
|
Deferred share compensation expense
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27
|
|
Restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
(158
|
)
|
|
|
|
|
|
|
|
|
|
|
158
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
176
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
176
|
|
Acquisition of 248,290 shares
for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(747
|
)
|
|
|
(747
|
)
|
Issuance of 199,599 shares for
employee benefit plans and stock options
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
(98
|
)
|
|
|
|
|
|
|
437
|
|
|
|
396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
134
|
|
|
|
21,412
|
|
|
|
50,347
|
|
|
|
462
|
|
|
|
17,207
|
|
|
|
(602
|
)
|
|
|
88,960
|
|
Comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,175
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,175
|
)
|
Decrease in unrealized investment
gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,549
|
)
|
|
|
|
|
|
|
(6,549
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160
|
)
|
|
|
|
|
|
|
(160
|
)
|
Deferred income tax attributable to
other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
2,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,536
|
)
|
Dividends accrued on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(1,206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,206
|
)
|
Deferred share compensation expense
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
|
(40
|
)
|
|
|
|
|
|
|
240
|
|
|
|
(1
|
)
|
Restricted stock grants
|
|
|
|
|
|
|
|
|
|
|
(66
|
)
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Acquisition of 45,619 shares
for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(132
|
)
|
|
|
(132
|
)
|
Issuance of 194,026 shares for
employee benefit plans and stock options
|
|
|
|
|
|
|
|
|
|
|
(15
|
)
|
|
|
(27
|
)
|
|
|
|
|
|
|
344
|
|
|
|
302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
134
|
|
|
|
21,412
|
|
|
|
48,925
|
|
|
|
(2,780
|
)
|
|
|
12,846
|
|
|
|
(84
|
)
|
|
|
80,453
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,936
|
|
|
|
|
|
|
|
|
|
|
|
8,936
|
|
Decrease in unrealized investment
gains
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(660
|
)
|
|
|
|
|
|
|
(660
|
)
|
Fair value adjustment to derivative
financial instrument
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
(165
|
)
|
Minimum pension liability adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216
|
|
|
|
|
|
|
|
216
|
|
Minimum pension liability
adjustment due to adoption of SFAS 158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,144
|
)
|
|
|
|
|
|
|
(1,144
|
)
|
Deferred income tax attributable to
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
614
|
|
|
|
|
|
|
|
614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,797
|
|
Issuance of 70,000 shares of
preferred stock
|
|
|
70
|
|
|
|
|
|
|
|
6,930
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,000
|
|
Dividends accrued on preferred stock
|
|
|
|
|
|
|
|
|
|
|
(155
|
)
|
|
|
(1,178
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,333
|
)
|
Deferred share compensation expense
|
|
|
|
|
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4
|
|
Restricted stock grants
|
|
|
|
|
|
|
22
|
|
|
|
(22
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned
compensation
|
|
|
|
|
|
|
|
|
|
|
66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66
|
|
Acquisition of 25,774 shares
for treasury
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70
|
)
|
|
|
(70
|
)
|
Issuance of 102,009 shares for
employee benefit plans and stock options
|
|
|
|
|
|
|
50
|
|
|
|
84
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
146
|
|
|
|
271
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
204
|
|
|
$
|
21,484
|
|
|
$
|
55,832
|
|
|
$
|
4,969
|
|
|
$
|
11,707
|
|
|
$
|
(8
|
)
|
|
$
|
94,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
51
ATLANTIC
AMERICAN CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands)
|
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
8,936
|
|
|
$
|
(3,175
|
)
|
|
$
|
5,017
|
|
Adjustments to reconcile net
income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of deferred
acquisition costs
|
|
|
23,486
|
|
|
|
26,264
|
|
|
|
22,846
|
|
Acquisition costs deferred
|
|
|
(20,069
|
)
|
|
|
(23,741
|
)
|
|
|
(25,208
|
)
|
Realized investment (gains)
losses, net
|
|
|
(6,691
|
)
|
|
|
10,456
|
|
|
|
(2,199
|
)
|
(Decrease) increase in insurance
reserves and policyholder funds
|
|
|
(15,790
|
)
|
|
|
(6,503
|
)
|
|
|
27,468
|
|
Compensation expense related to
share awards
|
|
|
70
|
|
|
|
65
|
|
|
|
203
|
|
Depreciation and amortization
|
|
|
955
|
|
|
|
1,079
|
|
|
|
1,361
|
|
Deferred income tax expense
(benefit)
|
|
|
1,957
|
|
|
|
(4,275
|
)
|
|
|
(834
|
)
|
Decrease (increase) in
receivables, net
|
|
|
7,131
|
|
|
|
14,932
|
|
|
|
(26,024
|
)
|
Increase (decrease) in other
liabilities
|
|
|
2,344
|
|
|
|
(1,701
|
)
|
|
|
990
|
|
Other, net
|
|
|
(1,833
|
)
|
|
|
(2,134
|
)
|
|
|
2,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
|
496
|
|
|
|
11,267
|
|
|
|
6,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from investments sold
|
|
|
35,197
|
|
|
|
44,606
|
|
|
|
45,924
|
|
Proceeds from investments matured,
called or redeemed
|
|
|
36,234
|
|
|
|
56,778
|
|
|
|
58,645
|
|
Investments purchased
|
|
|
(95,556
|
)
|
|
|
(109,310
|
)
|
|
|
(100,645
|
)
|
Additions to property and equipment
|
|
|
(299
|
)
|
|
|
(675
|
)
|
|
|
(575
|
)
|
Acquired insurance reserves and
policy funds (Note 3)
|
|
|
|
|
|
|
|
|
|
|
1,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by
investing activities
|
|
|
(24,424
|
)
|
|
|
(8,601
|
)
|
|
|
4,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of
Series D Preferred Stock
|
|
|
7,000
|
|
|
|
|
|
|
|
|
|
Preferred stock redemption
|
|
|
|
|
|
|
|
|
|
|
(500
|
)
|
Preferred stock dividends paid
|
|
|
|
|
|
|
|
|
|
|
(10
|
)
|
Proceeds from exercise of stock
options
|
|
|
16
|
|
|
|
34
|
|
|
|
154
|
|
Purchase of treasury shares
|
|
|
(70
|
)
|
|
|
(132
|
)
|
|
|
(747
|
)
|
Proceeds from bank financing
|
|
|
15,750
|
|
|
|
|
|
|
|
|
|
Repayments of debt
|
|
|
(13,250
|
)
|
|
|
(1,750
|
)
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities
|
|
|
9,446
|
|
|
|
(1,848
|
)
|
|
|
(4,103
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
and cash equivalents
|
|
|
(14,482
|
)
|
|
|
818
|
|
|
|
6,720
|
|
Cash and cash equivalents at
beginning of year
|
|
|
41,776
|
|
|
|
40,958
|
|
|
|
34,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end
of year
|
|
$
|
27,294
|
|
|
$
|
41,776
|
|
|
$
|
40,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow
information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
4,711
|
|
|
$
|
3,470
|
|
|
$
|
3,189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash (received) paid for income
taxes
|
|
$
|
(67
|
)
|
|
$
|
317
|
|
|
$
|
1,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
52
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
(Dollars
in thousands, except per share amounts)
|
|
Note 1.
|
Summary
of Significant Accounting Policies
|
Principles
of Consolidation
The accompanying consolidated financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America (GAAP)
which, as to insurance companies, differ from the statutory
accounting practices prescribed or permitted by regulatory
authorities. These financial statements include the accounts of
Atlantic American Corporation (Atlantic American or
the Parent) and its subsidiaries (collectively, the
Company). All significant intercompany accounts and
transactions have been eliminated in consolidation.
At December 31, 2006, the Parent had five insurance
subsidiaries, Bankers Fidelity Life Insurance Company
(Bankers Fidelity), American Southern Insurance
Company and its wholly-owned subsidiary, American Safety
Insurance Company (together known as American
Southern), Association Casualty Insurance Company and
Georgia Casualty & Surety Company (Georgia
Casualty), in addition to two non-insurance subsidiaries,
Association Risk Management General Agency, Inc., and
Self-Insurance Administrators, Inc. (SIA, Inc.).
Association Casualty Insurance Company and Association Risk
Management General Agency, Inc. are together termed
Association Casualty.
Premium
Revenue and Cost Recognition
Life insurance premiums are recognized as revenues when due;
accident and health premiums are recognized over the premium
paying period and property and casualty insurance premiums are
recognized as revenue over the period of the contract in
proportion to the amount of insurance protection provided.
Benefits and expenses are associated with premiums as they are
earned so as to result in recognition of profits over the lives
of the contracts. For traditional life insurance and
long-duration health insurance, this association is accomplished
by the provision of a future policy benefits reserve and the
deferral and subsequent amortization of the costs of acquiring
business, deferred policy acquisition costs
(principally commissions, premium taxes, and other expenses of
issuing policies). Deferred policy acquisition costs are
amortized over the estimated premium-paying period of the
related policies using assumptions consistent with those used in
computing the policy benefits reserve. The Company provides for
insurance benefits and losses on accident, health, and
property-casualty claims based upon estimates of projected
ultimate losses. The deferred policy acquisition costs for
property and casualty insurance and short-duration health
insurance are amortized over the effective period of the related
insurance policies. Deferred policy acquisition costs are
expensed when such costs are deemed not to be recoverable from
future premiums (for traditional life and long-duration health
insurance) and from the related unearned premiums and investment
income (for property and casualty and short-duration health
insurance).
Goodwill
Goodwill represents the excess of cost over the fair value of
net assets acquired and is not amortized. The Company
periodically reviews its goodwill to determine if any adverse
conditions exist that could indicate impairment. Conditions that
could trigger impairment include, but are not limited to, a
significant change in business climate that could affect the
value of the related asset, an adverse action, or an assessment
by a regulator. No impairment of the Companys recorded
goodwill was identified during any of the periods presented.
Investments
The Companys investments in both fixed maturity
securities, which include bonds and redeemable preferred stocks,
and equity securities, which include common and non-redeemable
preferred stocks, are classified as
available-for-sale
and, accordingly, are carried at fair value with the after-tax
difference from
53
amortized cost, as adjusted if applicable, reflected in
shareholders equity as a component of accumulated other
comprehensive income. The fair values for fixed maturity and
equity securities are largely determined by either independent
methods prescribed by the National Association of Insurance
Commissioners (NAIC), which do not differ materially
from nationally quoted market prices, when available, or
independent broker quotations. Certain non-redeemable preferred
stocks that do not have quoted values are carried at estimated
fair value as determined by management. With the exception of
short-term securities for which amortized cost is predominately
used to approximate fair value, security prices are first sought
from NAIC pricing services with the remaining unpriced
securities submitted to brokers for prices. Mortgage loans,
policy and student loans, and real estate are carried at
historical cost. Other invested assets are comprised of
investments in limited partnerships, limited liability
companies, and real estate joint ventures. Those which are
publicly traded are carried at estimated fair value and the
others are accounted for using the equity method. If the value
of a common stock, preferred stock, other invested asset, or
publicly traded bond declines below its cost or amortized cost,
if applicable, and the decline is considered to be other than
temporary, a realized loss is recorded to reduce the carrying
value of the investment to its estimated fair value, which
becomes the new cost basis. In evaluating impairment, the
Company considers, among other factors, the expected holding
period, the nature of the investment and the prospects for the
company and its industry. Premiums and discounts related to
investments are amortized or accreted over the life of the
related investment as an adjustment to yield using the effective
interest method. Dividends and interest income are recognized
when earned or declared. The cost of securities sold is based on
specific identification. Unrealized gains (losses) in the value
of invested assets are accounted for as a direct increase
(decrease) in accumulated other comprehensive income in
shareholders equity, net of deferred tax and, accordingly,
have no effect on net income.
Income
Taxes
Deferred income taxes represent the expected future tax
consequences when the reported amounts of assets and liabilities
are recovered or paid. They arise from differences between the
financial reporting and tax basis of assets and liabilities and
are adjusted for changes in tax laws and tax rates as those
changes are enacted. The provision for income taxes represents
the total amount of income taxes due related to the current
year, plus the change in deferred taxes during the year. A
valuation allowance is recognized if, based on managements
assessment of the relevant facts, it is more likely than not
that some portion of the deferred tax asset will not be realized.
Earnings
Per Common Share
Basic earnings per common share are based on the weighted
average number of common shares outstanding during each period.
Diluted earnings per common share are based on the weighted
average number of common shares outstanding during each period,
plus common shares calculated for stock options and share awards
outstanding using the treasury stock method and assumed
conversion of the Series B and Series D Preferred
Stock, if dilutive. Unless otherwise indicated, earnings per
common share amounts are presented on a diluted basis.
Stock
Options
On January 1, 2006, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 123
(revised 2004), Share-Based Payment
(SFAS No. 123R) using the modified
prospective transition method. SFAS No. 123R replaces
SFAS No. 123, Accounting for Stock-Based
Compensation (SFAS No. 123) and
supersedes Accounting Principles Board (APB) Opinion
No. 25, Accounting for Stock Issued to
Employees. The adoption of SFAS 123R did not have a
material impact on the Companys consolidated statements of
operations or net income (loss) per share. Prior to
January 1, 2006, stock options were reported under the
recognition and measurement principles of APB Opinion
No. 25 instead of the fair value approach recommended in
SFAS No. 123 as amended by SFAS No. 148,
Accounting for Stock-Based Compensation-Transition and
Disclosure. Accordingly, no stock-based employee
compensation cost attributable to stock options was reflected in
net income, as all stock options granted had an exercise price
equal to the market value of the underlying common stock on the
date of grant. Pro forma net income (loss) and net
54
income (loss) per common share were determined as if the Company
had accounted for its employee stock options under the fair
value method of SFAS No. 123. The fair value of these
options was determined at the date of grant using an options
pricing model, which requires the input of subjective
assumptions, including the volatility of the stock price. If the
Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation in
2005 and 2004, the Companys net income (loss) and net
income (loss) per share would have been as follows:
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income (loss), as reported
|
|
$
|
(3,175
|
)
|
|
$
|
5,017
|
|
Add: Stock-based employee
compensation expense included in reported net income(loss), net
of tax
|
|
|
42
|
|
|
|
132
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method,
net of tax
|
|
|
(144
|
)
|
|
|
(344
|
)
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss)
|
|
$
|
(3,277
|
)
|
|
$
|
4,805
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per common share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
Basic pro forma
|
|
$
|
(.21
|
)
|
|
$
|
.17
|
|
Diluted as reported
|
|
$
|
(.21
|
)
|
|
$
|
.18
|
|
Diluted pro forma
|
|
$
|
(.21
|
)
|
|
$
|
.17
|
|
The resulting pro forma compensation cost may not be
representative of that to be expected in future years.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash on hand and
investments in short-term, highly liquid securities which have
original maturities of three months or less from date of
purchase.
Impact
of Recently Issued Accounting Standards
In February 2007, the Financial Accounting Standards Board
(FASB) issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities,
Including an Amendment of FASB Statement No. 115.
This statement permits entities to choose, at specified election
dates, to measure eligible items at fair value (i.e., the fair
value option). Items eligible for the fair value option include
certain recognized financial assets and liabilities, rights and
obligations under certain insurance contracts that are not
financial instruments, host financial instruments resulting from
the separation of an embedded nonfinancial derivative instrument
from a nonfinancial hybrid instrument, and certain commitments.
Business entities are required to report unrealized gains and
losses on items for which the fair value option has been elected
in net income. The fair value option: (a) may be applied
instrument by instrument, with certain exceptions; (b) is
irrevocable (unless a new election date occurs); and (c) is
applied only to entire instruments and not to portions of
instruments. SFAS No. 159 is effective as of the
beginning of an entitys first fiscal year that begins
after November 15, 2007, although early adoption is
permitted under certain conditions. The Company does not
currently expect to apply the fair value option to any eligible
items.
In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of
SFAS No. 87, 88, 106, and 132(R).
SFAS No. 158 requires the full recognition of the
overfunded or underfunded status of a defined benefit pension
plan as an asset or liability along with a corresponding
after-tax adjustment to accumulated other comprehensive income
(loss) included in shareholders equity. Under previous
accounting standards, information about the then-current funded
status of such plan was reported in the notes to the financial
statements. The recognition and the disclosure requirements of
SFAS No. 158 are effective for fiscal years ending
after December 15, 2006. Adoption of this statement did not
have a material impact on the Companys financial position
or results of operations.
55
In September 2006, the Securities and Exchange Commission
(SEC) issued Staff Accounting Bulletin
(SAB) No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements
(SAB No. 108). SAB No. 108
provides guidance for how errors should be evaluated to assess
materiality from a quantitative perspective.
SAB No. 108 permits companies to initially apply its
provisions by either restating prior financial statements or
recording the cumulative effect of initially applying the
approach as adjustments to the carrying values of assets and
liabilities as of January 1, 2006 with an offsetting
adjustment to retained earnings. The guidance provided by
SAB No. 108 was considered and did not have an effect
on the Companys financial position or results of
operations.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. SFAS No. 157
defines fair value, establishes a framework for measuring fair
value under accounting principles generally accepted in the
United States, and enhances disclosures about fair value
measurements. SFAS No. 157 provides guidance on
measuring fair value when required under existing accounting
standards and establishes a hierarchy that prioritizes the
inputs to valuation techniques. SFAS No. 157 is
effective for fiscal years beginning after November 15,
2007. Adoption of this statement is not expected to have a
material impact on the Companys financial position or
results of operations.
In July 2006, the FASB issued Financial Interpretation No.
(FIN) 48, Accounting for Uncertainty in Income
Taxes an interpretation of FASB Statement
No. 109. FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an entitys
financial statements in accordance with SFAS No. 109,
Accounting for Income Taxes and prescribes a
recognition threshold and measurement attribute for financial
statement disclosure of tax positions taken, or expected to be
taken, in a tax return. Additionally, FIN 48 provides
guidance on derecognition, classification, interest and
penalties, accounting in interim periods, disclosure and
transition. FIN 48 is effective for fiscal years beginning
after December 15, 2006, with early adoption permitted.
Adoption of this Interpretation is not expected to have a
material impact on the Companys financial position or
results of operations.
In September 2005, the AICPA issued Statement of Position
05-1,
Accounting by Insurance Enterprises for Deferred
Acquisition Costs (DAC) in Connection with
Modifications or Exchanges of Insurance Contracts,
(SOP 05-1).
SOP 05-1
provides guidance on accounting by insurance enterprises for DAC
on internal replacements of insurance. An internal replacement
is a modification in product benefits, features, rights or
coverages that occurs by the exchange of a contract for a new
contract, or by amendment, endorsement, or rider to a contract,
or by the election of a feature or coverage within a contract.
Modifications that result in a replacement contract that is
substantially changed from the replaced contract should be
accounted for as an extinguishment of the replaced contract.
Unamortized DAC, unearned revenue liabilities and deferred sales
inducements from the replaced contract must be written-off.
Modifications that result in a contract that is substantially
unchanged from the replaced contract should be accounted for as
a continuation of the replaced contract.
SOP 05-1
is effective for internal replacements occurring in fiscal years
beginning after December 15, 2006, with earlier adoption
encouraged. The Company will adopt
SOP 05-1
on January 1, 2007 and does not expect the effect of the
adoption to be material.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections, a replacement of
APB Opinion No. 20 and SFAS No. 3.
SFAS No. 154 applies to all voluntary changes in
accounting principles and changes the requirements of accounting
for and reporting a change in accounting principle and is
effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005.
SFAS No. 154 requires retrospective application to
prior periods financial statements of a voluntary change
in accounting principle unless such application is impractical.
APB Opinion No. 20 previously required that most voluntary
changes in accounting principle be recognized by including in
net income, in the period of the change, the cumulative effect
of change to the new accounting principle. Adoption of this
statement did not have a material impact on the Companys
financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, which
replaces SFAS No. 123 and supersedes APB Opinion
No. 25. SFAS No. 123R requires all companies to
recognize compensation costs for share-based payments to
employees based on the grant-date fair value of the award for
financial statements. The pro forma
56
disclosures previously permitted under SFAS No. 123
are no longer an alternative to financial statement recognition.
The transition method included a prospective or retrospective
adoption option. The Company adopted SFAS No. 123R
during the first quarter of 2006 using the prospective method.
Adoption of this statement did not have a material impact on the
Companys financial condition or results of operations.
Use of
Estimates in the Preparation of Financial
Statements
The preparation of financial statements and related disclosures
in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and
expenses during the reporting period. Significant estimates and
assumptions are used in developing and evaluating deferred
income taxes, deferred acquisition costs, insurance reserves,
investments, pension benefits, commitments and contingencies,
among others, and actual results could differ from
managements estimates.
Investments were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
obligations of U.S. Government agencies and authorities
|
|
$
|
176,302
|
|
|
$
|
169
|
|
|
$
|
2,411
|
|
|
$
|
178,544
|
|
Obligations of states and
political subdivisions
|
|
|
824
|
|
|
|
20
|
|
|
|
|
|
|
|
804
|
|
Corporate securities
|
|
|
64,499
|
|
|
|
3,890
|
|
|
|
493
|
|
|
|
61,102
|
|
Mortgage-backed securities
(government guaranteed)
|
|
|
2,093
|
|
|
|
13
|
|
|
|
25
|
|
|
|
2,105
|
|
Redeemable preferred stocks
|
|
|
18,598
|
|
|
|
938
|
|
|
|
185
|
|
|
|
17,845
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
262,316
|
|
|
|
5,030
|
|
|
|
3,114
|
|
|
|
260,400
|
|
Common and non-redeemable
preferred stocks
|
|
|
28,826
|
|
|
|
17,669
|
|
|
|
122
|
|
|
|
11,279
|
|
Other invested assets (estimated
fair value of $3,030)
|
|
|
3,030
|
|
|
|
|
|
|
|
69
|
|
|
|
3,099
|
|
Mortgage loans (estimated fair
value of $1,564)
|
|
|
1,378
|
|
|
|
|
|
|
|
|
|
|
|
1,378
|
|
Policy and student loans
|
|
|
1,949
|
|
|
|
|
|
|
|
|
|
|
|
1,949
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Investment in unconsolidated trusts
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
298,775
|
|
|
|
22,699
|
|
|
|
3,305
|
|
|
|
279,381
|
|
Short-term investments
|
|
|
20,188
|
|
|
|
|
|
|
|
|
|
|
|
20,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
318,963
|
|
|
$
|
22,699
|
|
|
$
|
3,305
|
|
|
$
|
299,569
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Carrying
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Gains
|
|
|
Losses
|
|
|
Cost
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities and
obligations of U.S. Government agencies and authorities
|
|
$
|
139,113
|
|
|
$
|
286
|
|
|
$
|
1,919
|
|
|
$
|
140,746
|
|
Obligations of states and
political subdivisions
|
|
|
1,037
|
|
|
|
35
|
|
|
|
|
|
|
|
1,002
|
|
Corporate securities
|
|
|
66,072
|
|
|
|
1,441
|
|
|
|
361
|
|
|
|
64,992
|
|
Mortgage-backed securities
(government guaranteed)
|
|
|
2,459
|
|
|
|
29
|
|
|
|
24
|
|
|
|
2,454
|
|
Redeemable preferred stocks
|
|
|
24,889
|
|
|
|
200
|
|
|
|
344
|
|
|
|
25,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
|
233,570
|
|
|
|
1,991
|
|
|
|
2,648
|
|
|
|
234,227
|
|
Common and non-redeemable
preferred stocks
|
|
|
34,445
|
|
|
|
20,800
|
|
|
|
90
|
|
|
|
13,735
|
|
Other invested assets (estimated
fair value of $4,887)
|
|
|
3,660
|
|
|
|
1
|
|
|
|
|
|
|
|
3,659
|
|
Mortgage loans (estimated fair
value of $2,664)
|
|
|
1,941
|
|
|
|
|
|
|
|
|
|
|
|
1,941
|
|
Policy and student loans
|
|
|
2,076
|
|
|
|
|
|
|
|
|
|
|
|
2,076
|
|
Real estate
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
38
|
|
Investment in unconsolidated trusts
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
1,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
276,968
|
|
|
|
22,792
|
|
|
|
2,738
|
|
|
|
256,914
|
|
Short-term investments
|
|
|
27,726
|
|
|
|
|
|
|
|
|
|
|
|
27,726
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
304,694
|
|
|
$
|
22,792
|
|
|
$
|
2,738
|
|
|
$
|
284,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bonds and short-term investments having an amortized cost of
$17,856 and $17,861 were on deposit with insurance regulatory
authorities at December 31, 2006 and 2005, respectively, in
accordance with statutory requirements.
Securities with unrealized losses at December 31, 2006 and
2005 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and
obligations of U.S. Government agencies and authorities
|
|
$
|
43,189
|
|
|
$
|
365
|
|
|
$
|
99,300
|
|
|
$
|
2,071
|
|
|
$
|
142,489
|
|
|
$
|
2,436
|
|
Corporate securities
|
|
|
9,142
|
|
|
|
75
|
|
|
|
11,409
|
|
|
|
418
|
|
|
|
20,551
|
|
|
|
493
|
|
Redeemable preferred stocks
|
|
|
|
|
|
|
|
|
|
|
6,850
|
|
|
|
185
|
|
|
|
6,850
|
|
|
|
185
|
|
Common and non-redeemable
preferred stocks
|
|
|
1,201
|
|
|
|
113
|
|
|
|
1,491
|
|
|
|
9
|
|
|
|
2,692
|
|
|
|
122
|
|
Other invested assets
|
|
|
3,030
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
3,030
|
|
|
|
69
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$
|
56,562
|
|
|
$
|
622
|
|
|
$
|
119,050
|
|
|
$
|
2,683
|
|
|
$
|
175,612
|
|
|
$
|
3,305
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Less than 12 months
|
|
|
12 months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
U.S. Treasury securities and
obligations of U.S. Government agencies and authorities
|
|
$
|
85,191
|
|
|
$
|
1,215
|
|
|
$
|
36,406
|
|
|
$
|
728
|
|
|
$
|
121,597
|
|
|
$
|
1,943
|
|
Corporate securities
|
|
|
7,044
|
|
|
|
185
|
|
|
|
5,102
|
|
|
|
176
|
|
|
|
12,146
|
|
|
|
361
|
|
Redeemable preferred stocks
|
|
|
4,282
|
|
|
|
169
|
|
|
|
5,543
|
|
|
|
175
|
|
|
|
9,825
|
|
|
|
344
|
|
Common and non-redeemable
preferred stocks
|
|
|
2,795
|
|
|
|
61
|
|
|
|
794
|
|
|
|
29
|
|
|
|
3,589
|
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporary impaired securities
|
|
$
|
99,312
|
|
|
$
|
1,630
|
|
|
$
|
47,845
|
|
|
$
|
1,108
|
|
|
$
|
147,157
|
|
|
$
|
2,738
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market changes in interest rates and credit spreads result in
changes in the fair values of investments and are accumulated
and reported as unrealized gains and losses. The majority of the
unrealized losses at both December 31, 2006 and 2005 were
primarily attributable to increases in interest yields on
comparable investments.
Excluding U.S. Treasury securities and obligations of
U.S. Government agencies and authorities, the change in
value of which is deemed solely related to interest rate
movements, the Company held investments in less than 30 issuers
which had unrealized investment losses at December 31, 2006
and 2005, respectively. As of December 31, 2006, the
Company had investments of $777 and $424, respectively, in the
common stocks of each of Gray Television and Triple Crown Media,
with temporary impairments not exceeding 13% of the carrying
value of each invesment. Both of the companies were subject to a
common restructuring during the year ended December 31,
2006. During December 31, 2005, the Company had investments
exceeding $1,000 in the redeemable preferred stocks of JP
Morgan Chase and Viacom with temporary impairments not exceeding
7% of the carrying value of each investment. The Company
continues to monitor these, and all other investments, but
believes the impairments to be temporary.
During the years ended December 31, 2006, 2005, and 2004,
the Company recorded impairments related to the following
investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Corporate bonds(1)
|
|
$
|
|
|
|
$
|
9,492
|
|
|
$
|
|
|
Redeemable preferred stocks(1)
|
|
$
|
|
|
|
$
|
1,274
|
|
|
$
|
281
|
|
Common stocks
|
|
$
|
|
|
|
$
|
|
|
|
$
|
179
|
|
|
|
|
(1) |
|
Includes automotive sector impairments of $10,709 in 2005,
primarily from holdings in General Motors and related entities. |
As part of the Companys ongoing investment review, the
Company has reviewed its investment portfolio and concluded that
there were no additional investments with other than temporary
impairments as of December 31, 2006 or 2005. The evaluation
for other than temporary impairments is a quantitative and
qualitative process, which is subject to risks and uncertainties
in the determination of whether declines in the fair value of
investments are other than temporary. The risks and
uncertainties include changes in general economic conditions, an
issuers financial condition or near term recovery
prospects and the effects of changes in interest rates. As a
result of issuers continued satisfaction of the investment
obligations in accordance with their contractual terms, if
applicable, and managements expectation that they will
continue to do so, also if applicable, managements intent
and ability to hold these securities, as well as the evaluation
of the fundamentals of the issuers financial condition and
other objective evidence, the Company believes that the
unrealized losses on investments at December 31, 2006 and
2005 were temporary.
The amortized cost and carrying value of fixed maturities and
short-term investments at December 31, 2006 by contractual
maturity were as follows. Actual maturities may differ from
contractual maturities
59
because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Amortized
|
|
|
|
Value
|
|
|
Cost
|
|
|
Due in one year or less
|
|
$
|
58,364
|
|
|
$
|
58,367
|
|
Due after one year through five
years
|
|
|
31,752
|
|
|
|
31,302
|
|
Due after five years through ten
years
|
|
|
35,764
|
|
|
|
34,940
|
|
Due after ten years
|
|
|
154,531
|
|
|
|
153,874
|
|
Varying maturities
|
|
|
2,093
|
|
|
|
2,105
|
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
282,504
|
|
|
$
|
280,588
|
|
|
|
|
|
|
|
|
|
|
Investment income was earned from the following sources:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Fixed maturities
|
|
$
|
15,638
|
|
|
$
|
13,026
|
|
|
$
|
13,403
|
|
Common and non-redeemable
preferred stocks
|
|
|
1,220
|
|
|
|
2,056
|
|
|
|
1,438
|
|
Mortgage loans
|
|
|
184
|
|
|
|
250
|
|
|
|
285
|
|
Short-term investments
|
|
|
944
|
|
|
|
920
|
|
|
|
329
|
|
Other
|
|
|
337
|
|
|
|
433
|
|
|
|
405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment income
|
|
|
18,323
|
|
|
|
16,685
|
|
|
|
15,860
|
|
Less investment expenses
|
|
|
(175
|
)
|
|
|
(225
|
)
|
|
|
(220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
18,148
|
|
|
$
|
16,460
|
|
|
$
|
15,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of realized investment gains (losses) follows: